Looking for passive income? Exchange-traded funds (ETFs) are a good choice. These vehicles can instantly diversify your money, minimizing volatility. And if you choose the right ETF, you can earn reliable cash income that will last you the rest of your life. So what is the best ETF for permanent passive income? It’s an ETF I’ve been looking at for decades.
The best investments for permanent passive income
Nothing is ever truly permanent. But if an income stream can be reliable for the rest of your life, that’s pretty close. If you want permanent passive income, look into utility stocks. Utility stocks are one of the best investments on the market right now for generating reliable profits.
Utilities provide the basic resources needed to run a modern economy – things like water, electricity and natural gas. These services are generally recession-proof. That is, during a recession, demand drops very little or not at all. For example, since 2010, annual electricity demand in the US has remained between 3,856 terawatt hours and 4,067 terawatt hours, despite many economic ups and downs.
Think about cutting back on your water or heating usage during a bear market. There may be a dip in the commercial and industrial sectors, but overall, utility demand has been remarkably stable regardless of economic conditions.
If volumes are stable, what about prices? Again, there’s good news if you’re looking for businesses that can generate steady income. Many utilities are considered “rate regulated.” That means regulators dictate their profits in advance. This is to ensure that customers are not taken advantage of, as they often have limited choices when it comes to electricity or heating.
These regulations limit the positive side, but also provide a stable base for expectations. So utilities can not only maintain stable volumes under all economic conditions, but also maintain stable prices.
These factors combine to generate reliable profits for utilities. And because these companies have already built up their expensive distribution infrastructure, they can return a large percentage of these profits to shareholders in the form of dividends.
All you need to do is find an ETF that can automatically invest in dozens of the best utility stocks on the market.
My favorite ETF for long-term passive income
Do you want to invest in utility stocks to build a passive income stream over the long term? Look no further than the Vanguard Utilities ETF (NYSEMKT: VPU). As the name suggests, this ETF mainly invests in utility companies: about 65 in total. That includes everything from energy companies like NextEra Energy And Southern Co. to water companies such as American Water Works Co. And Essential Utilities Inc.
Since 2004, the Vanguard Utilities ETF has delivered a total annual return of approximately 9%. More than a third of that performance was driven by dividends, which currently yield a 3.6%. That’s lower than some other high-yield options out there, but this is where this ETF shines. Passive income streams must be reliable from year to year. But it shouldn’t matter how much of the income stream comes through dividends or capital growth. In fact, tax laws can even make capital gains a more attractive option for generating income.
The Vanguard Utilities ETF offers a healthy mix of both. About a third of its long-term performance comes from dividends, which regularly provide shareholders with cold, hard cash. But two-thirds of performance is due to capital growth. You can simply sell shares to generate income from these paper profits, potentially paying less tax due to the preferential tax treatment on long-term capital gains.
Through both dividends and capital growth, the Vanguard Utilities ETF can provide you with a stable foundation to generate passive income for decades to come. No matter where the economy goes, people will demand water, heat and electricity, no matter how long your investment horizon.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
Do you want passive income for decades? Buy this ETF and hold it forever, originally published by The Motley Fool
