The Basics of Vanguard's High Dividend Yield ETF

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Worldwide Invest Better Day 9/25/2012

The Motley Fool has been helping ordinary people become better investors for nearly two decades. This month, we're reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.

Along those lines, I'm planning to take a look at many of the most popular exchange-traded funds in the market today. ETFs have skyrocketed in popularity, but it's important to understand exactly what you're getting when you buy an ETF. Today, I'd like to focus on the Vanguard High Dividend Yield ETF (NYSE: VYM  ) , an ETF that has capitalized on investors looking for as much yield as possible.

Why buy Vanguard High Dividend Yield?
Dividend stocks have become popular for a couple of reasons. First and foremost, with bonds and other income-producing investments seeing rate reductions, cash-strapped investors have had to take drastic measures to get the money they need to make ends meet. But in addition, smart investors realize that receiving cash through dividends is often a better use of company capital than wastefully expending it on costly, ill-advised acquisitions or badly timed buybacks.

Vanguard High Dividend Yield isn't the biggest dividend ETF out there. It's not even the biggest Vanguard dividend ETF, as sibling Vanguard Dividend Appreciation (NYSE: VIG  ) is more than double its size. But with $5.2 billion in assets, it's no slouch, either.

Vanguard High Dividend Yield tracks an index of high-yielding dividend stocks. But don't make the mistake of assuming that you'll own a bunch of tiny companies with unsustainably high yields. The ETF's list of stocks reads like a who's-who of corporate America's most successful companies. ExxonMobil (NYSE: XOM  ) leads the list even with its modest 2.5% yield, and Wal-Mart pays an even smaller yield to investors. That said, you'll also find some big dividend payers among the ETF's holdings, with telecom stocks AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) being obvious choices thanks to their high levels of free cash flow and generous sharing of that capital with shareholders.

Vanguard High Dividend Yield does a great job of keeping costs low, charging annual expenses of just $13 for every $10,000 you invest. In the income department, it does better than its sibling ETF Vanguard Dividend Appreciation, with High Dividend Yield's $325 in annual income per $10,000 investment beating out its Vanguard competitor by about $100.

Learn more
Vanguard High Dividend Yield does a good job of tapping into the dividend stock universe. To learn more about it, use this link to the ETF's main information page, and be sure to follow the Fool's coverage on the ETF using our My Watchlist feature. You can also get some useful guidance on some promising dividend stocks in the Fool's special free report "Secure Your Future With 9 Rock-Solid Dividend Stocks."

Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

Fool contributor Dan Caplinger likes stocks that pay him back. He owns shares of Vanguard Dividend Appreciation. The Motley Fool owns shares of ExxonMobil. 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 Fool's disclosure policy likes giving you the basics.

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