Want Decades of Passive Income? Buy This Index Fund and Hold It Forever

If you're looking for an ETF that's capable of generating decades of consistent, predictable passive income, you're looking for stocks capable of doing the same.

Sure, high-yielders might be able to produce more income, but there's always the question of whether those yields are sustainable. An economic downturn could easily lead to some of those big payouts getting cut.

In my opinion, you want companies that have not only paid dividends for years but have also grown them. That demonstrates commitment and an ability to keep generating the cash flows and profits necessary to keep rewarding shareholders indefinitely.

That's why the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) is a great choice for long-term income. Granted, the current 1.6% yield probably isn't going to get anybody too excited, but if your time horizon is decades and you want a portfolio that's durable enough to get you there, VIG is worth a look.

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How the Vanguard Dividend Appreciation ETF can produce decades of income

VIG tracks the S&P U.S. Dividend Growers index. This index targets U.S. companies that have grown their annual dividend for at least 10 straight years, but it doesn't include the top 25% of the highest-yielding stocks. Qualifying stocks are then weighted by market capitalization.

There are a couple of noteworthy things about this approach.

First, the elimination of the highest yields right off the bat improves portfolio quality. Some of these stocks could be referred to as "yield traps," meaning that they're high because of a falling share price, not improved financial performance. Those are the stocks that are vulnerable to cuts and below-average returns.

Second, that screen unfortunately also eliminates some genuine high-yielders. Some of the traditionally higher-yield sectors, including real estate, energy, and utilities, have minimal presence in VIG's portfolio. Investors probably shouldn't ever expect the Vanguard Dividend Appreciation ETF to be a source of significant income.

Third, the cap-weighting methodology produces a different portfolio composition from many of VIG's peers. It essentially disregards dividend history, quality, and yield and simply gives the biggest companies the biggest weights. That becomes apparent when you see that VIG's three largest holdings, Broadcom, Microsoft, and Apple, all have yields under 1%. That helps the fund's growth profile, but it doesn't help its income prospects.

Why dividend growth matters more than yield

The reason I consider dividend growth the proper measuring stick of long-term income success is the commitment involved. Companies with long track records of not just paying dividends but growing them have essentially committed to keep it going indefinitely. Paying a dividend is fine. Growing a dividend consistently means it's a priority.

Sure, some high-yielding stocks have dividend growth streaks as well. But a high yield could be more vulnerable to instability. If a company comes under some type of financial duress, cutting the dividend may be the easiest way to raise capital.

Quality is perhaps the most important factor for a stock. It signals a level of financial health that affords the company some flexibility, but that doesn't mean it will prioritize the dividend. It may choose to focus on buybacks or reinvesting the money into the business.

Dividend growers have shown that they're focused on regularly paying shareholders. That's the most important factor when you're judging long-term dividend sustainability. The ability to generate income that can stay ahead of inflation helps ensure that shareholders are rewarded with steady purchasing power.

VIG's growth and quality are a winning combination

A look at the Vanguard Dividend Appreciation ETF's portfolio shows that its dividend growth strategy is backed by quality. Most of the companies in the portfolio are big cash-flow generators that consistently grow revenue and profits.

Those are the kinds of companies that belong in almost any portfolio. The ability to generate decades of passive income on top of it makes VIG a great choice for investors.

David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.