1 No-Brainer Dividend ETF to Generate Thousands of Dollars in Passive Income

Generating thousands of dollars a year in passive income from your portfolio sounds great, but there's a right way and a wrong way to do it.

Investing in stocks based solely on their yields can result in a portfolio of companies with poor balance sheets, inadequate cash flows, and shrinking stock prices. A better way to go about it is to find a diversified dividend exchange-traded fund (ETF) that focuses on above-average yields without sacrificing long-term growth potential in the process.

That way, you can capture the income, maintain quality in your portfolio, and diversify away some downside risk.

The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) is a solid way to take this approach. It focuses on risk mitigation, mostly through diversification, but is still able to deliver a dividend yield more than double that of the S&P 500. Plus, the biggest positions in the fund are big, durable, cash-generating companies that can handle multiple economic environments.

VYM includes hundreds of high-yield stocks

The Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index, which targets companies that are expected to offer above-average dividend yields. It starts with a very broad universe of U.S. stocks, calculates a forecasted dividend yield for each, and selects those in the top half for inclusion.

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It's a relatively simple strategy that admittedly has the potential to go wrong because it only uses yield as a selection criterion. But the fact that it includes more than 600 stocks minimizes the risk that any one blow-up could hurt the portfolio. With a 2.2% dividend yield currently, its income component is far higher than what the broader market offers.

The fund's biggest advantage right now, however, could be its sector composition.

Financials at 21% of the portfolio is currently the top sector holding. This could be interesting because banks and other institutions can benefit from higher rates, since this improves their margins. With the Fed potentially raising rates later this year and long-end Treasury yields already setting multi-year highs, the environment could be right for this sector to outperform.

Industrials is second at 14%. It's been steadily outperforming the S&P 500 all throughout 2026 as the demand for aerospace and defense and artificial intelligence (AI) data centers remains strong. Tech is third and provides meaningful exposure to the AI trade outside of just the well-known mega-cap names.

Among dividend ETFs, that's a fairly attractive mix that could be positioned to do well over the next few quarters.

How VYM generates thousands of dollars in passive income

The current yield on the Vanguard High Dividend Yield ETF isn't nearly as high as it's been over the past few years. But you don't necessarily need a huge yield to generate a substantial passive income stream.

At the current yield of 2.2%, a $100,000 investment would generate around $2,200 in annual dividends, or just under $200 per month. Increase the investment amount to $250,000, and you're looking at $5,500 in yearly dividends.

Granted, that number can move up and down as the yield, the portfolio, and the share price change. But it's a really good example of how significant income can be produced from your portfolio even when yields are down.

The current investment case looks even better considering the market backdrop. With the Magnificent Seven stocks collectively lagging the S&P 500 this year, new sectors have emerged as outperformers. As fiscal, geopolitical, and inflationary concerns mount, the Vanguard High Dividend Yield ETF has a portfolio built to benefit.

For dividend investors, that could make it a no-brainer for this market.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.