What's Warren Buffett's favorite fund manager? It's almost certainly Vanguard. He has bought only two exchange-traded funds (ETFs) for Berkshire Hathaway's portfolio. Vanguard runs the fund with more of Berkshire's money invested. Buffett also revealed years ago that he recommended that much of the cash his family inherits be invested in a Vanguard S&P 500 index fund.
Income investors have several great options within Vanguard's lineup of funds. Three of them especially stand out, in my opinion. Investing $10,000 in each of these three Vanguard ETFs could generate $1,164 per year in passive income.
1. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF's (NYSEMKT: VYM) name tells you what you need to know about the fund's goal. It attempts to track the performance of the FTSE High Dividend Yield index, which includes stocks with high dividend yields.
This ETF currently owns 450 stocks with a median market cap of nearly $133 billion. These stocks tend to be valued attractively compared to the S&P 500; the average price-to-earnings (P/E) ratio of Vanguard High Dividend Yield's holdings is 16.7. The fund's top five holdings are Broadcom, JPMorgan Chase, ExxonMobil, Johnson & Johnson, and Procter & Gamble.
It pays dividends quarterly. Its dividend yield is 3.01%. Investing $10,000 in the ETF would generate annual income of $301.
Since its inception in November 2006, Vanguard High Dividend Yield has delivered an average annual total return of 8.24%. Because it's a passively managed fund, its annual expense ratio is low -- only 0.06%.
2. Vanguard International High Dividend Yield Index Fund ETF
The key word to note with the Vanguard International High Dividend Yield Index Fund ETF(NASDAQ: VYMI) is "international." This Vanguard ETF focuses only on high-yield dividend stocks based outside of the U.S. It seeks to track the performance of the FTSE All-World ex-U.S. High Dividend Yield index.
The Vanguard international fund is more diversified than Vanguard High Dividend Yield, with 1,329 stocks. The median market cap of these stocks is around $45 billion. They're also more attractively valued than Vanguard High Dividend Yield's portfolio, with an average P/E ratio of 9.6. The top five holdings in the ETF are Toyota, Novartis, Shell, Roche, and BHP Group.
This ETF pays a quarterly dividend that currently yields 4.55%. An investment of $10,000 would generate annual income of $455.
The performance of international stocks hasn't been as impressive as U.S. stocks in recent years. As a result, Vanguard International High Dividend Yield's average annual total return of 7.92% since its inception in February 2016 isn't as high as the No. 1 ETF on this list. Another downside of this ETF is its relatively high expense ratio (compared to other Vanguard funds) of 0.22%.
3. Vanguard Real Estate Index Fund ETF
Real estate has been a longtime favorite for income investors. Vanguard offers an easy way to invest in real estate with its Vanguard Real Estate Index Fund ETF(NYSEMKT: VNQ). This fund attempts to closely track the performance of the MSCI U.S. Investable Market Real Estate 25/50 index.
Vanguard Real Estate owns 159 stocks mainly consisting of real estate investment trusts (REITs), with a median market cap of roughly $26 billion. Many of these REITs aren't what you'd call bargains, though: The average P/E multiple of the ETF is 35.5. The fund's top five holdings are the Vanguard Real Estate II Index Fund Institutional Plus Shares mutual fund, Prologis, American Tower, Equinix, and Crown Castle.
REITs must return at least 90% of their taxable income to shareholders through dividends. As a result, Vanguard Real Estate pays an attractive quarterly dividend that yields 4.08%. If you invested $10,000 in the ETF, you'd receive $408 in annual income. This brings the total passive income for these three Vanguard ETFs to $1,164.
The main knock against Vanguard Real Estate is performance. The ETF has generated an average annual total return of 7.41% since its inception in September 2004. Its annual expense ratio of 0.12% is a little higher than some Vanguard index funds but well below the 1.1% average expense ratio of similar funds outside of the Vanguard family.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in Berkshire Hathaway and ExxonMobil. The Motley Fool has positions in and recommends American Tower, Berkshire Hathaway, Crown Castle, Equinix, JPMorgan Chase, Prologis, Vanguard Specialized Funds-Vanguard Real Estate ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom, Johnson & Johnson, and Roche Ag and recommends the following options: long January 2026 $180 calls on American Tower, long January 2026 $90 calls on Prologis, and short January 2026 $185 calls on American Tower. The Motley Fool has a disclosure policy.
