The Vanguard High Dividend Yield ETF (VYM 0.23%) has long been a go-to vehicle for investors seeking diversified exposure to income-generating stocks. The exchange-traded fund (ETF) combines 404 stocks with above-average dividend yields, is constructed to track the performance of the FTSE High Dividend Yield Index, and has a yield of roughly 3.2%.
Vanguard's High Dividend ETF offers a simplified way to build diversified exposure to a wide range of dividend-paying stocks, but is it still a top choice for income investors? That might depend on what you're looking for.
Low fees and easy diversification from a trusted source
Vanguard has a sterling reputation in the financial services space. The company has been in operation for nearly 45 years, and it's developed a reputation for reliability, making information easily accessible, and strong client relations.
Vanguard and its founder John Bogle actually pioneered the index-tracking fund with the launch of the First Index Investment Trust mutual fund in 1975, and its success led to the creation of exchange-traded funds that made index-tracking investments even more accessible to the average investor.
The company is also known for operating funds with management fees that tend to come in well below the industry average, and the High Dividend ETF certainly fits that bill. The passively managed fund has a low expense ratio at just 0.06%, and the company says that the average expense ratio for a fund with similar holdings is 1.01%.
Higher expenses will turn into a significant drag on your returns over time, so Vanguard's low expenses can be a big advantage when investing in dividend-focused ETFs. If you're looking for a fund that offers low expenses and is backed by a trusted name, the Vanguard High Dividend Yield ETF has you covered.
What's in the fund?
An investment in the Vanguard High Dividend Yield ETF can be thought of as an investment in the broader U.S. stock market (foreign holdings constitute just 1.4% of the fund's weight as of this writing). The fund is highly concentrated on the U.S. market, but it's also diversified across that landscape. The table below breaks down the fund in terms of weight by sector as of Nov. 30, 2019:
|Percentage of Fund Holdings
|Oil & gas
The fund's diversification may be a positive or a negative, depending on your investing goals. If you're not particularly bullish on the outlook for the financials sector or think that the oil and gas market could be in for a tough run due to overproduction or growth for renewable energy sources, the fund's composition might not suit what you're looking for. Otherwise, the Vanguard High Dividend Yield ETF provides a way to be invested across the U.S. market and generate income along the way.
The fund is weighted toward large-cap stocks, which tends to mean more stability on pricing and dividends. The High Dividend Yield ETF's 10 largest holdings accounted for 26.3% of the fund's total weight as of Nov. 30, and the table below lists its top holdings by weight as of that date:
|Percentage of Fund Holdings
|Johnson & Johnson
|Procter & Gamble
Should you buy the Vanguard High Dividend Yield ETF?
The nature of the fund's composition means that it will always offer a dividend that's above the market average, but some investors may find that the yield comes in below what they're looking for. If you're retired or close to it and looking for big dividends as a significant source of income, the yield of Vanguard's premier dividend fund might fall short of meeting your needs. While the ETF isn't an ideal vehicle for investors aiming to maximize yield, it's still worthwhile for most people and a holding that can provide a foundation in a wide variety of portfolios.
If the broader stock market performs well over the long term, the High Dividend Yield ETF should put up strong performance as well -- with the added benefit of reliably generating a dividend yield above the broader market. For long-term investors seeking a diversified, income-generating ETF, Vanguard's High Dividend Yield fund stands out as a top choice in the category.