Want Decades of Passive Income? Buy This ETF and Hold It Forever.

Are you at a point in your investing life where you just want to tuck some money away and collect dividends from it? Well, good news! You've got plenty of simple options. A single exchange-traded fund (ETF) could do the trick, in fact, even if you consider yourself a sophisticated investor capable of handling more complicated positions.

That fund? The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG). Here's the deal.

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What's the Vanguard Dividend Appreciation ETF?

An ETF is simply a basket of stocks that makes it easy for you to diversify your holdings. Most of these funds -- which are bought and sold just like ordinary stocks -- hold anywhere from a few dozen to a few hundred individual equities. These baskets, of course, reflect the ever-changing collective value of all the holdings in them.

Just as the name suggests, the Vanguard Dividend Appreciation ETF holds a bunch of dividend-paying stocks that are not only likely to continue making these payments, but to grow these payments over time. Indeed, this particular fund is built to reflect the S&P U.S. Dividend Growers Index, which requires a company to have upped its annual payout for at least 10 consecutive years to be named a constituent.

As of the most recent look, 338 tickers were eligible to be a part of the S&P U.S. Dividend Growers Index. Most of these companies are, of course, able to maintain this growth track record for far longer once they reach this milestone.

Admittedly, this fund's trailing dividend yield of 1.6% is less than thrilling. It's only a tad better than the S&P 500's yield of around 1.2%, and that average includes a bunch of stocks that don't pay any dividends at all!

However, there's more to the story.

Think (and see the) bigger picture

Plowing into dividend stocks with unusually large yields is not an uncommon mistake, particularly for newer investors. You might do better than average right out of the gate. If you're looking for decades of passive income, however, these names could ultimately do you more harm than good.

High-yielding stocks often sport those higher yields for a reason. More often than not, the market rightly fears that the underlying dividend payments aren't apt to grow much, if at all. Take well-known consumer staples company Kraft Heinz as an example. Its forward-looking yield of 5.1% is well above the current norm for blue chips of its kind. But its quarterly payment hasn't budged since being lowered in 2019, and there's no evidence that any dividend growth is on the horizon.

That's why investors will often accept a lower dividend yield at the onset of a trade -- they anticipate reliable, sizable dividend increases in the future.

The Vanguard Dividend Appreciation ETF has certainly delivered in this regard. Last quarter's per-share payment of $0.835 is roughly 50% more than what it was dishing out five years back, and more than twice the dividend it was paying 10 years ago. That beats inflation by a country mile!

VIG data by YCharts.

The irony is that, although income-minded investors obviously own reliable dividend growers for the income they offer, these stocks often also dish out respectable price appreciation anyway.

Numbers crunched by mutual fund company Hartford indicate that since 1973, stocks of companies with a policy of -- and the sustained capability of -- raising their annual dividends ended up averaging net annual returns of just over 10%. That eclipses non-dividend payers' typical yearly stock gains of barely over 4%.

In this same vein, there's a 70% chance a strong dividend-paying stock will outperform the S&P 500 in any given year, while there's less than a 50% chance a so-so dividend payer will do so. What gives? It stands to reason that a company capable of maintaining dividend growth is a well-run operation that also skillfully handles other matters.

And, yes, in this case past performance often does at least somewhat suggest what a ticker's future results are likely to be.

Simpler is better

It's obviously not your only dividend-paying option. You can own individual dividend-paying stocks as well, and other dividend-paying ETFs. It's your money and your portfolio, after all.

If you're looking for a passive income pick that can truly be hands-off for decades, though, the Vanguard Dividend Appreciation ETF is arguably your best bet. You won't need to do any buying and selling of anything. Standard & Poor's will update the underlying index as merited, while Vanguard mirrors any such changes with this fund's holdings.

All you need to do is decide whether or not you want to reinvest the dividends, and then dive in.

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*Stock Advisor returns as of December 16, 2024

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.