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

British rock group Dire Straits had a monster hit back in the 1980s with their song Money for Nothing. While the instantly recognizable guitar riff was arguably the song's main appeal, its sentiment is attractive, too. Most people would love to have money for nothing. That's what passive income is all about. You reap rewards without having to work for them beyond the initial steps.

If you want to enjoy decades of passive income, I think Vanguard offers a good way to achieve your goal. Here's one of its exchange-traded funds (ETFs) to buy and hold forever.

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A proven winner

Since we're talking about passive income and Vanguard, you might think the ETF I have in mind is the Vanguard High Dividend Yield ETF. After all, this fund has "high dividend yield" in its name. That will sound great to income investors.

As good of a pick as the Vanguard High Dividend Yield ETF is, though, I'd argue there's an even better choice in the Vanguard family right now: the Vanguard Utilities ETF (NYSEMKT: VPU). This ETF offers a 30-day SEC yield of 2.89%, higher than any other stock ETF Vanguard offers (including the Vanguard High Dividend Yield ETF). A fund's SEC yield is calculated via a formula developed by the Securities and Exchange Commission that looks at a fund's hypothetical annualized income as a percentage of its assets.

Unsurprisingly, the Vanguard Utilities ETF invests in utility stocks. It currently owns 69 stocks, with top holdings including NextEra Energy, Southern Company, Duke Energy, Constellation Energy, and American Electric Power. These five stocks comprise nearly 35% of the ETF's assets.

This Vanguard ETF has delivered an average annual total return of 9.58% since its inception in January 2004. It's been an especially strong performer over the last 12 months, soaring close to 19%. The fund has even held up well during the recent stock market plunge.

Like all Vanguard ETFs, the Vanguard Utilities ETF is inexpensive to own. Its annual expense ratio is only 0.09%, well below the average expense ratio of 1.01% for similar funds.

Why this Vanguard ETF is a passive income machine

I don't think there's any question that the Vanguard Utilities ETF is a passive income machine. But why? Several reasons stand out.

First, many of the utility companies in the fund's portfolio are regulated monopolies. This means they have predictable and stable cash flow. And that translates to steady dividends.

Are utilities risk-free? Unfortunately not. Utility companies sometimes borrow too much and have to cut their dividends. Their share prices aren't immune to volatility, either. However, utility stocks are typically less risky than most stocks.

Importantly, dividends often make up a core part of the investment thesis for utility stocks. The management teams of utility companies recognize this. As a result, they emphasize consistent dividend payments and dividend growth as a key part of the corporate culture. For example, NextEra Energy and Southern Company (the Vanguard Utilities ETF's top two holdings) have increased their dividends for 31 and 24 consecutive years, respectively.

Also, utilities usually compete in relatively mature markets. This gives them flexibility to return more of their profits to shareholders via dividends.

One caveat

The Vanguard Utilities ETF is a great pick for investors seeking passive income. However, growth-oriented investors might prefer other ETFs offered by Vanguard. The Vanguard Utilities ETF ranks behind 29 other Vanguard ETFs based on average annual total return since inception.

That said, I think the Vanguard Utilities ETF could be poised for stronger growth in the coming years than it has delivered in the past. The rising adoption of artificial intelligence (AI) is fueling the construction of more data centers. These data centers require massive amounts of electric power. This presents great growth prospects for electric utility companies, natural gas utility companies, and renewable power companies that make up the lion's share of this Vanguard ETF's portfolio.

Should you invest $1,000 in Vanguard Utilities ETF right now?

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy, NextEra Energy, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.