Is the Vanguard Utilities ETF the Smartest Income Play You Can Make Right Now?

The utilities sector isn't a haven for growth stocks. Still, utilities stocks have long been favored by investors seeking the alluring combination of above-average dividends and low volatility.

To be fair to the defensive sector, there are occasions when it generates solid returns. Just look at the Vanguard Utilities ETF (NYSEMKT: VPU). Last year, that exchange-traded fund (ETF) gained 16.5% as utilities ranked as the fourth-best sector in the S&P 500 (SNPINDEX: ^GSPC). The utilities ETF's showing wasn't far off the pace set by the Vanguard S&P 500 ETF (NYSEMKT: VOO), which jumped 17.8% in 2025.

This utilities ETF is a smart income idea with some AI exposure, too. Image source: Getty Images.

A solid showing like that is a bonus, considering the impressive dividend yields found in the utilities sector by comparison. For its part, the Vanguard sector ETF boasts a 30-day SEC yield of 2.73%, which is more than double the yield of its S&P 500 counterpart.

That's one point confirming this utilities fund is a bright income idea, but there's more to the story, pointing to the Vanguard ETF joining the ranks of the smartest income bets.

This ETF is a surprising AI play

For nearly the entire lifespan of the utilities sector, the group has been viewed as a stodgy fixed-income proxy. Still, thanks to the artificial intelligence (AI) boom, the sector's growth proposition has been refreshed. No, investors won't find "Magnificent Seven" stocks residing in this Vanguard sector ETF. Still, they will find an array of companies tethered to the soaring power demands created by AI's acceleration.

Hyperscalers are shelling out hundreds of billions of dollars annually to build energy-intensive data centers. That expansion is relevant to investors considering this utilities ETF, because Goldman Sachs forecasts a 2.5% compound annual growth rate (CAGR) in U.S. power consumption from 2023 through 2030, with a significant portion of that increase attributed to data centers.

Some of the ETF's holdings are already generating AI benefits. Constellation Energy, the fund's second-largest component, inked a 20-year power purchase agreement (PPA) with Meta Platforms last June. The utility notched a similar accord with Microsoft in September 2024.

Talen Energy, a smaller member of the ETF's lineup, has a 20-year PPA with Amazon to power an Amazon Web Services (AWS) data center in Pennsylvania.

Don't forget NextEra Energy. The largest domestic utility and the most significant holding in the Vanguard ETF, at a weight of 11.5%, is about a month removed from announcing an expansion of a long-running partnership with Alphabet's Google Cloud unit.

This ETF has other tailwinds

The rub with the AI-induced enthusiasm permeating the utilities sector is that as share prices rallied, dividend yields declined. That scenario appears to diminish the sector's income proposition, but payout growth remains compelling. Specific to this ETF, several of its 68 holdings are Dividend Kings, or stocks with annual dividend increase streaks of at least 50 years. That includes American States Water, which has a 71-year streak of dividend increases.

Additionally, the $8.8 billion Vanguard ETF could have non-AI benefits in store for investors this year if the Federal Reserve continues lowering interest rates, which can boost the capital-intensive utilities sector.

These perks are available for a modest annual fee of 0.09%, or $9 on a $10,000 investment.

Todd Shriber has positions in Alphabet and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Constellation Energy, Goldman Sachs Group, Meta Platforms, Microsoft, NextEra Energy, and Vanguard S&P 500 ETF. The Motley Fool 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.