The Best ETF for 2012: Vanguard High Dividend Yield

This article is part of our Best ETFs for 2012 series, in which we're seeking out the top-performing ETFs for the coming year.

I'm a big believer in the idea that a strong portfolio needs a strong foundation.

Sure, it can be great to own high-flying biotechs and precious metals miners and other hot, trendy investments -- those trends can be seriously profitable, after all -- but those aren't the stuff that a portfolio's foundation is made of.

For me, the foundation of a great portfolio is made of large-cap dividend stocks, those big blue chips that you can profitably hold for decades. Those are exactly the kinds of stocks I want to be holding when the global economy is looking shaky and markets are looking confused, as they are right now. And that's why I think the Vanguard High Dividend Yield ETF (NYSE: VYM  ) , which is chock-full of just those kinds of stocks, is one of the best ETFs for 2012 -- or any year.

The case for big dividend stocks
While big dividend stocks are good to have anytime, it's in turbulent times like these that the best of them really shine. Giant global companies such as Johnson & Johnson (NYSE: JNJ  ) and Procter & Gamble (NYSE: PG  ) and the other big names in the Dow Jones Industrials (INDEX: ^DJI  ) have the established revenue streams, global reach, access to capital, and massive brand strength needed to survive and thrive in the global economy's choppy waters -- advantages most smaller companies don't share.

It's true that stocks like these won't give you the growth of a great small cap, but dividends help make up some of that lost ground. If you choose companies with a long history of annual dividend increases -- and this ETF's top holdings include a bunch, as we'll see shortly -- and reinvest the payments, you have a good chance of growth even when the market's going nowhere. Even a 3% dividend that is raised a bit every year can give you 8% returns or better over the long term, before factoring in any changes in the stock's price.

Plain and simple, just about everyone could benefit from holding some stocks like these. The beauty of this ETF is that it makes the shopping process a breeze.

A great portfolio foundation, in one trade
Vanguard's High Dividend Yield ETF is actually an index ETF, but it tracks the performance of an index you've probably never heard of, the FTSE High Dividend Yield index. In practice, the fund holds (mostly) big-name large-cap dividend stocks with a history of paying above-average dividends.

In fact, the fund's top holdings list is like a Who's Who of great stocks with strong and rising dividends. Some of the names:

  • AT&T (NYSE: T  ) , with its massive size and 5.9% yield, the largest dividend payer in the world -- with an annual payout of more than $10 billion. And next week it will become the newest name on Standard & Poor's "Dividend Aristocrats" list, which includes companies that have increased their dividend payments annually for at least 25 years in a row.
  • Oil giant Chevron (NYSE: CVX  ) , a well-run global behemoth with an above-average 3.7% dividend. It's not a Dividend Aristocrat, but it could make the list next year -- it has raised its dividend annually for 24 years in a row and counting.
  • Coca-Cola (NYSE: KO  ) , another Aristocrat, with one of the world's greatest brands, plenty of overseas growth potential, and a history of annual dividend increases that goes back almost half a century.
  • Procter & Gamble, arguably the world's greatest and best-run consumer products company, with gold-standard brands and, like Coke, opportunities for major growth in markets like China and India. It's another Aristocrat (55 years and counting) -- one that has more than doubled in value over the last decade.
  • Johnson & Johnson, the Band-Aid maker and great health-care colossus -- and yet another Aristocrat, with a streak of increases that could hit the half-century mark next year.

It's a pretty well-diversified lot -- overall, the fund's top four sectors are consumer staples, industrials, energy, and health care, with no one sector comprising more than 20% of the portfolio. The expenses are up (or perhaps I should say "down") to Vanguard's usual excellent standards, with an expense ratio of just 0.18%, and the fund's yield is running right around 3.3% -- quite strong, given the diversification that you get with it.

The upshot: a top-notch cornerstone
The truth is, I can't even begin to guess what the top-performing ETF of 2012 will be. The global economy is too fragile, too many things are in turmoil. But that's exactly why I like this fund. It's a great way to quickly give your portfolio the solid base it needs to get through 2012 in good shape, no matter what the year brings -- and I'm backing up that recommendation by giving this ETF the green thumbs-up in my CAPS.

Stay tuned throughout our series on the Best ETFs for 2012 to find out about all of the picks our Foolish contributors have made. Click back to the series intro for links to the entire series.

Fool contributor John Rosevear holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Coca-Cola and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Chevron, Procter & Gamble, Coca-Cola, and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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