Dividend stocks have been a lifesaver for investors who need income from their investment portfolios, especially in light of rock-bottom interest rates on bonds and other fixed-income assets. In particular, Vanguard High Dividend Yield ETF (VYM 0.56%) offers a low-cost way to get diversified exposure to more than 400 stocks, all of which have above-average dividend yields.
Yet as with most funds, a substantial portion of the Vanguard ETF's assets go toward just a handful of stocks, and the ETF's top-five holdings make up nearly 20% of the entire portfolio. Let's look more closely at the stocks that Vanguard High Dividend Yield ETF sees as being most important to its success.
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Vanguard High Dividend Yield ETF's top holdings
|
Stock |
Percent of Portfolio |
|---|---|
|
Microsoft (MSFT +2.11%) |
5.14% |
|
ExxonMobil (XOM 1.08%) |
4.12% |
|
Johnson & Johnson (JNJ 1.37%) |
3.46% |
|
JPMorgan Chase (JPM 1.09%) |
3.41% |
|
General Electric (GE +0.80%) |
3.06% |
Data source: Morningstar.
What the Vanguard ETF's top holdings say about its strategy
Investors look to dividend ETFs to provide a combination of high income and broad-based diversification. The fund's five-largest holdings show how Vanguard High Dividend Yield achieves both of those goals. With exposure to technology, energy, healthcare, financials, and industrials, the five stocks above would make up an impressive mini-portfolio in their own right. Moreover, they all have better dividend yields than the overall market, ranging from JPMorgan Chase's 2.3% yield to the 3.5% that ExxonMobil currently pays.
Yet in some ways, the fact that the Vanguard ETF's top-five holdings are as diverse as they are is just an accident of the market. The ETF tracks the FTSE High Dividend Yield Index, which weights its components by market capitalization. It's only because Microsoft has the highest valuation of any of the companies in the index that it shows up at the top of the list.
That's not the way all dividend ETFs work. Some base their weightings on the actual dividends that each component pays. Under that rubric, ExxonMobil would have a heavier weighting than Microsoft because the energy giant's dividend payments on an annual basis are higher than what the tech behemoth pays. The net impact on performance is to keep the Vanguard ETF's returns more in line with large-cap stock indexes, generally, because the relative weightings will be similar to the broader index.
How Vanguard High Dividend Yield's top holdings have fared
Dividend stocks have been extremely popular, and all five of the stocks above have given investors double-digit returns over the past year, contributing to the Vanguard ETF's performance. JPMorgan Chase has led the way with gains of more than 55%, as the rise in interest rates and more favorable conditions in the financial markets have combined to give the Wall Street banking colossus a more encouraging outlook going forward. Microsoft has produced 26% returns over the past year as it continues to find ways to navigate changing emphasis areas in the tech industry.
For ExxonMobil, the stock's 19% return has come on the heels of an impressive rebound in energy prices from their lows in early 2016. Yet even with the gains, crude oil in the $50s still has room to run higher, and some ExxonMobil investors are counting on seeing further gains in order to support earnings and dividends more securely. Meanwhile, Johnson & Johnson also produced 19% gains for shareholders over the past year, riding the success of its pharmaceutical segment, but making key gains in its medical device and consumer products businesses, as well.
General Electric brings up the rear with gains of just 10%. Yet GE has equally solid potential as it continues to key in on its core industrial exposure. Having largely moved out of the volatile financials arena following the financial crisis in 2008 and early 2009, General Electric now hopes that investments in areas like aerospace, energy, and healthcare will keep paying off in the future.
Keep watching dividend stocks
With these stocks in its arsenal, the Vanguard High Dividend Yield ETF has the capacity to keep delivering on the dividend front. With high yields, income investors will be pleased to see these five stocks and the rest of the ETF's portfolio generate solid dividends both now and in the future.
