Vanguard High Dividend Yield ETF (VYM -0.25%) has its flaws, but then so does every other investment you will ever buy. What's interesting about the dividend-focused exchange-traded fund (ETF) is what it does well. Here's why some, though not all, dividend investors may want to back up the truck and buy this income-focused ETF like there's no tomorrow.
1. Vanguard High Dividend Yield ETF has an attractive yield
With the word dividend in the name, you are probably looking at Vanguard High Dividend ETF as a source of income. So the dividend yield is the place to start in this review. But the story really needs to start with the scant 1.2% dividend yield on offer from the S&P 500 index (^GSPC -0.05%). Vanguard High Dividend ETF easily bests that bar, offering a yield of roughly 2.6%.
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Offering more than twice the yield of the S&P 500 is hard to complain about. However, you can easily find ETFs with higher yields. So if yield alone is all you looked at, Vanguard High Dividend ETF wouldn't be the winner. But there are other factors that help set it apart.
2. Vanguard High Dividend ETF is low cost
One of the big benefits offered by exchange-traded funds more broadly is low costs. Vanguard High Dividend ETF's expense ratio is a very low 0.06%. There are cheaper ETFs to own, but that's still a very low expense ratio. In fact, you'd probably have to go with an S&P 500 index ETF to find a lower-cost ETF option. Note that some dividend-focused ETFs have expense ratios that are multiples of what you'll pay to own Vanguard High Dividend ETF.
3. Higher numbers over time with Vanguard High Dividend ETF
As the chart below highlights, Vanguard High Dividend ETF's dividend has trended higher over time. And, at the same time, the price of the ETF has also trended higher over time. So you get a growing income stream and capital appreciation. That's a nice combination that will help investors offset the ravages of inflation.
4. Vanguard High Dividend ETF is simple to understand
Some exchange-traded funds are fairly complex, and others are extremely simple. Vanguard High Dividend ETF leans toward the simple side. It tracks the FTSE High Dividend Yield Index. This index basically takes all of the dividend-paying companies available on U.S. exchanges and buys the half with the highest yields. Very clearly, this is focused on dividend yield, but the key is that this approach leads to a giant portfolio of around 580 stocks.
5. Diversification is the big story with Vanguard High Dividend ETF
That brings the story to the final and most important point. The reason you would want to buy Vanguard High Dividend ETF like there's no tomorrow is because of the diversification that owning over 500 stocks provides. It could easily replace an S&P 500 index fund for investors that want to bias their portfolios toward dividends. You can find higher-yielding ETFs. You can find ETFs with better returns. You can even find ETFs with more diversification. But Vanguard High Dividend ETF is a solid combination of all of these factors in one simple investment.
It could be your only stock ETF in a simple two-ETF balanced portfolio. It could be a foundation on which you layer other dividend ETFs. It could even be the foundation on which you build a dividend stock portfolio. It isn't perfect, but it could still be the perfect choice for some investors.
If you understand Vanguard High Dividend ETF, it could be a great choice
Each of the items above is framed as a positive, but for some investors those positives could also be framed as flaws. For example, if yield is all you care about, then providing more than twice the yield of the S&P 500 index probably won't be exciting enough. And the diversification the portfolio offers, thanks to the very wide net the selection process casts, effectively limits the yield the ETF can generate.
By effectively owning half of the dividend payers, the portfolio has no choice but to reach further down the yield scale. And yet Vanguard High Dividend ETF still provides a good compromise across many factors that will make it a great fit for a lot of investors.
