There's a common problem with passive income: Generating it isn't as passive as investors expect. Owning real estate often comes with plenty of work. Finding attractive investments that provide income can also take time and effort.
But it doesn't have to be so difficult. Looking for an easy way to earn passive income? One Vanguard exchange-traded fund (ETF) pays a dividend yield of nearly 4.9%.
Think globally
ETFs offer a great way to invest in a large basket of stocks in one fell swoop. Vanguard ranks as one of the top companies in the ETF industry and is known for its low-cost funds. Its lineup includes many ETFs that pay solid dividend yields. However, if you want especially juicy yields you'll need to think globally.
The Vanguard International High Dividend Yield Index Fund ETF(NASDAQ: VYMI) lives up to its name. It focuses on international stocks only -- no U.S.-based stocks are included at all. It also owns only stocks with exceptionally high dividend yields.
You'll probably recognize several of this Vanguard ETF's top holdings. Japanese automaker Toyota Motor, Swiss drugmaker Novartis , British oil and gas giant Shell, Swiss drugmaker Roche, and British financial services leader HSBC are the five largest positions in the fund.
Unlike some passive income investments, you won't have to have a small fortune to invest in the Vanguard International High Yield Index Fund ETF. The share price of the ETF is currently below $70.
Why this Vanguard ETF could be a good pick for income investors
As previously mentioned, the Vanguard International High Yield Index Fund ETF pays a dividend yield of nearly 4.9%. This yield tends to fluctuate somewhat as new companies replace others. That's good news for income investors, though, because they won't get stuck with companies that slash their dividend payouts.
The diversification available with this Vanguard ETF is another plus. It owns 1,324 stocks. A few laggards won't hurt your portfolio very much.
Historically, the ETF has had more winning stocks than losers. That's evident from its lifetime average annual return of 8.31%. Over the last 12 months, the fund has delivered a total return of over 14.5%.
I think the Vanguard International High Yield Index Fund ETF could continue to reward investors with solid dividend income and share appreciation. The stocks in its portfolio have an average price-to-earnings multiple of only 10.2. You don't have to worry about sky-high valuations increasing the risk of steep pullbacks.
The quality of the ETF's portfolio appears to be good too. The average annual earnings growth rate of the stocks owned by the Vanguard fund is 11.1%. Also, the ETF isn't loaded with higher-risk start-ups. The median market cap of the stocks it owns is $45.9 billion.
A few things to keep in mind
Every investment has some downsides. The Vanguard International High Yield Index Fund ETF is no exception.
For one thing, it's a little more expensive than most Vanguard ETFs. The fund's annual expense ratio is 0.22%. However, that's not too bad considering the average expense ratio of similar funds is 0.97%.
This ETF also has a limited history. It was created in February 2016. As a result, the average returns since inception won't necessarily give as good of a picture of historical performance as more established Vanguard funds.
Most importantly, the ETF's focus on international stocks can increase your risk. That's especially the case with 21.6% of the fund invested in companies operating in emerging markets.
Despite these downsides, the Vanguard High Yield Index Fund ETF provides an easy way to generate passive income. It could be a good fit for income investors willing to accept a higher risk level in exchange for a higher yield.
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends HSBC Holdings and Roche Ag. The Motley Fool has a disclosure policy.
