The past year hasn't been kind to income investors. Next-to-nothing interest rates have translated to next-to-nothing returns on traditionally safe fixed-income investments like bonds and CDs. To get returns that can outpace inflation, it's essential to invest in stocks.
Vanguard has a number of exchange-traded funds (ETFs) that are perfect for those seeking low-risk investment income. ETFs give you the instant diversification that's almost impossible to achieve by handpicking your own stocks. And the beauty of Vanguard ETFs is that they have some of the lowest fees out there. Here are four Vanguard funds income investors should seriously consider.
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1. Vanguard Real Estate ETF (VNQ)
The Vanguard Real Estate Investment ETF (VNQ -0.22%) offers a way to invest across the entire U.S. real estate market without buying up physical property. It invests mostly in equity real estate investment trusts (REITs), which own and operate income-generating commercial real estate.
Investing in REITs is a savvy move for income investors, because they're legally required to distribute at least 90% of their taxable income as dividends. The fund also includes a handful of real estate development and management companies.
With $61.4 billion in assets, it's by far the largest real estate ETF in the U.S. The fund has an expense ratio of 0.12%, which is cheaper than the 0.48% average for REIT ETFs. A 0.12% expense ratio means that just 12 cents of every $1,000 you invest is going toward the fund's management fees.
The VNQ has an enticing dividend yield of 3.31% as of Jan. 31. That's more than double the 1.53% that the S&P 500 offers.
2. Vanguard High Dividend Yield ETF (VYM)
The Vanguard High Dividend Yield ETF (VYM -0.08%) is the most popular dividend ETF in the U.S. It tracks an index of 410 companies, with REITs excluded, based on their dividend forecast for the next 12 months. Its five largest holdings as of Jan. 31, 2021 were:
- Johnson & Johnson
- JP Morgan Chase
- Procter and Gamble
- Bank of America
- Intel
Although the fund doesn't specifically screen stocks based on risk, it tends to be less risky compared to the broad market. That's because companies that consistently pay dividends tend to be relatively stable.
The fund's dividend yield is 3.05% as of Feb. 28. But it also offers decent potential gains. As of that same date, the ETF delivered a one-year total return of 19.68%. It has an expense ratio of just 0.06%, making it a bargain compared to the 0.41% average for similar funds.
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3. Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF (VIG -0.46%) invests in companies that not only pay dividends but also have a history of increasing their payments. It tracks the Nasdaq U.S. Dividend Achievers Select Index, which consists of 212 stocks known as Dividend Achievers, because they have at least 10 years of consecutive dividend hikes. The VIG's five largest holdings as of Jan. 31 were:
- Microsoft
- Walmart
- Johnson & Johnson
- Procter and Gamble
- UnitedHealth Group
Stocks with a history of increasing their dividends are attractive to retirees, who are often hit hard by inflation. For investors in general, though, a steadily rising payout is appealing, because it indicates the company's finances are stable enough to support that dividend growth.
The VIG also has a super-low expense ratio of 0.06%. Its yield of 1.66% is lower than Vanguard's High Dividend Yield ETF, but one-year total returns as of Feb. 28 were higher at 23.62%.
4. Vanguard Value ETF (VTV)
The final fund to consider if you're seeking a low-risk investment with solid income-generating potential is the Vanguard Value ETF (VTV -0.05%). The fund tracks the CRSP U.S. Large Cap Value Index.
The index starts with stocks that make up the top 85% of the U.S. stock market by market capitalization. It then uses metrics such as the price-to-book ratio, earnings to price, and dividend-to-price ratio to identify value stocks which appear to be underpriced.
Income investors tend to like value stocks, because they typically have stable revenue and earnings, and most pay dividends. The fund consists of 328 holdings, the largest of which are:
- Johnson & Johnson
- Berkshire Hathaway
- JP Morgan Chase
- Procter and Gamble
- UnitedHealth Group
The VTV's one-year total returns were 21.34% as of Feb. 28, and its dividend yield was 2.44%. The expense ratio is the lowest for the ETFs discussed here at 0.04%.
Like the other funds on this list, the VTV doesn't offer huge growth potential. But the stability of its holdings and its low fees make it a strong choice for those seeking investment income.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Robin Hartill, CFP owns shares of Vanguard REIT ETF. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Microsoft, and Vanguard REIT ETF. The Motley Fool owns shares of Vanguard Dividend Appreciation ETF, Vanguard High Dividend Yield ETF, and Vanguard Value ETF. The Motley Fool recommends Intel, Johnson & Johnson, and UnitedHealth Group and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), long January 2023 $57 calls on Intel, short March 2021 $225 calls on Berkshire Hathaway (B shares), short January 2023 $57 puts on Intel, and long January 2023 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
