Here's My Favorite Passive Income Investment

For years, international stocks were the portfolio allocation everyone regretted. U.S. tech stocks dominated markets. International value lagged. Currency headwinds killed returns on international investments. The Vanguard International High Dividend Yield ETF (NASDAQ: VYMI) sat in portfolios generating modest yields while growth investors got rich on Nvidia and Microsoft.

Then 2025 happened. Year to date, this fund has returned 29.6% compared to 15.6% for the S&P 500 (SNPINDEX: ^GSPC). The dollar weakened. International valuations looked cheap. Suddenly, owning dividend-paying companies in Europe, Japan, and emerging markets wasn't a drag -- it was the trade.

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Here's why this exchange-traded fund (ETF) has morphed into my favorite passive income play in 2025.

The international dividend advantage

The Vanguard International High Dividend Yield ETF owns 1,531 stocks across 40 countries, all selected for above-average dividend yields. The top five holdings are composed of blue chippers HSBC, Novartis, Roche, Nestlé, and Shell. Reflecting its focus on income, the Vanguard International High Dividend Yield ETF yields a generous 3.95% -- triple the S&P 500's present yield.

Financials comprise roughly 42% of assets, reflecting strong dividend traditions in international banking. Industrials, energy, and consumer staples make up another 24% combined.

These aren't flashy growth stocks. Rather, they are established companies in developed markets that generate cash and return it to shareholders. The fund's relatively low 0.17% expense ratio means more dividend income lands in your pocket instead of paying management fees.

Why international investing finally works

For years, U.S. stocks outperformed the rest of the world. America's tech-heavy market left value-tilted international portfolios behind. Now the valuation gap is stark. The S&P 500 trades around 29 times earnings, while this fund sits near 13 times for businesses with comparable profit profiles.

A weaker dollar in 2025 boosted results. When the dollar drops, overseas holdings are worth more in dollar terms. That tailwind may fade since currencies swing and trade policy adds noise. Even so, the valuation spread suggests international stocks can keep advancing without help from currency exchange rates.

The diversification nobody wanted

Americans love home bias. Why own international stocks when the S&P 500 dominates? Because concentration risk eventually bites.

Technology currently represents over 30% of most broad-based U.S. stock indices. If artificial intelligence (AI) disappoints or tech multiples compress, domestic portfolios face serious drawdowns.

This fund provides geographic diversification across developed and emerging markets. Europe offers stable dividend payers trading at discounts. Japan reformed corporate governance, pushing companies to return more cash to shareholders.

Emerging markets provide growth exposure at value prices. When U.S. tech stumbles, international value often holds up better. The 29% year-to-date return proves diversification works when cycles turn.

The passive income machine

With the Vanguard International High Dividend Yield ETF, quarterly dividends arrive like clockwork. The most recent payout was $0.70 per share in September 2025. Over the past five years, dividend growth averaged 3.55% annually. That's not explosive growth, but it beats inflation and compounds over time.

Compare this to chasing high yields in struggling sectors or individual stocks. The fund owns 1,531 companies. If one cuts dividends, 1,530 others keep paying. Diversification smooths income volatility.

The 0.17% expense ratio costs just $17 annually on a $10,000 investment. Over decades, that low cost compounds into significantly higher returns compared to actively managed international dividend funds charging 1% or more.

Why this Vanguard ETF works now as a passive income vehicle

International stocks haven't always cooperated. The fund dropped 12.7% in 2018 and another 7% in 2022. Moreover, the currency tailwinds that pushed the fund higher this year could evaporate in the blink of an eye.

But the setup finally makes sense. The fund trades at just 13 times earnings, while the S&P 500 sits at a mind-blowing 29, pressing up against all-time highs. That valuation gap provides real downside protection. The fund's 3.95% yield also delivers generous levels of passive income, regardless of whether markets rise or fall.

After years of lagging, the Vanguard International High Dividend Yield Index Fund ETF's stellar performance this year suggests something fundamental has shifted. For investors seeking reliable passive income without overpaying for growth, this fund offers one of the most efficient packages available in the ETF landscape.

HSBC Holdings is an advertising partner of Motley Fool Money. George Budwell has positions in HSBC Holdings, Microsoft, Nvidia, and Vanguard International High Dividend Yield ETF. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool recommends HSBC Holdings, Nestlé, and Roche Holding AG 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.