Have $200 to Invest? This High-Yield Vanguard ETF Could Help Kick-Start Passive Income.

If you are new to investing, then exchange-traded funds (ETFs) may be a good place to start your journey. That’s because they are highly liquid, essentially trade like stocks, and provide diversification, as ETFs hold a basket of stocks.

ETFs can also pay dividends. Many more risk-averse investors prefer to pursue dividend stocks because they can provide passive income every year, often in a more reliable manner than investing in stocks for pure capital appreciation.

Have $200 to invest? This high-yield Vanguard ETF could help kick-start your passive income.

A basket of high-quality companies

The Vanguard Long-Term Corporate Bond ETF (VCLT 0.95%) aims to generate passive income primarily by focusing on investment-grade corporate bonds while maintaining a weighted-average maturity of 10 to 25 years. The fund’s fees are on the low end with an expense ratio of 0.03%. The fees are cheap due to the fund’s passive management approach — as well as Vanguard’s overall dedication to keeping them low.

Corporate bonds are financial instruments issued by companies to raise debt capital. When investors buy bonds, they are essentially lending money to the company. These bonds will be repaid like a loan, and companies often make fixed interest payments twice a year in exchange for borrowing the money.

As one might imagine, corporate bonds carry credit risk because if a company fails, it won’t have funds to pay back its bondholders. Credit agencies assign ratings to companies that issue bonds to guide investors on the creditworthiness of a company, although nothing is ever risk-free. An investment-grade rating is assigned to higher-quality companies with better balance sheets and financials, and, therefore, they are more likely to repay their creditors.

Approximately 89% of VCLT’s bonds carry an investment-grade rating of A or BBB. There are various levels of investment-grade. A is in the middle of investment-grade ratings, while BBB is toward the lower end of the spectrum. Still, if you look at some of the top bonds in VCLT, you’ll notice that many of these are high-quality companies unlikely to fail:

• Anheuser-Busch
• CVS Health
• Goldman Sachs
• Boeing
• Wells Fargo
• AT&T
• AbbVie
• Bank of America

In addition to credit risk, bonds also carry interest rate risk, meaning the value of the bonds declines as interest rates rise. That’s because the Federal Reserve’s federal funds rate influences the interest rates on most, if not all, financial instruments. If the Fed increases rates, bonds get issued with higher interest rates, making the old bonds with lower interest rates worth less.

As most recall, the Fed jacked up interest rates rapidly through most of 2022 and 2023, which explains why VCLT is down roughly 30% over the past five years. However, as long as companies don’t default and the bonds reach maturity, investors will be paid back in full plus the interest. Another factor that can help older bonds recover their value is a decline in interest rates. The more the Fed lowers interest rates from here, the more quickly VCLT’s price should rebound.

A strong yield

VCLT can be a great way to kick-start your passive income, as it currently yields 5.62%, which is an extremely high dividend yield. I generally consider a 3% dividend yield to be strong, while the current yield of the S&P 500 index is about 1.15%. The fund also has a good track record of consistently paying dividends. While dividend payouts have varied a bit over the fund’s life, VCLT has consistently paid dividends since 2009 and always with a strong associated yield.