Exchange-traded funds (ETFs) have evolved over the years and now give investors many different options to choose from. They can be particularly valuable when your focus is on dividends. Since an ETF may give you a position in dozens or even hundreds of dividend stocks, the risk to one specific stock becomes fairly small.
And you can still get a relatively high yield from an ETF that pays more than the S&P 500, which averages just 1.2%. Plus, many ETFs charge small and even minuscule fees, allowing you to keep the vast majority of any dividend income you collect from them.
There are many ETFs that fit this criteria already. But below, I'm focusing on an even better ETF, one that pays you more than double the S&P 500 average, and which has an extremely low expense ratio. The ETF I'm talking about is the Vanguard High Dividend Yield Index Fund ETF (VYM 0.41%), and here's why it can be an excellent option for any type of investor.
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The Vanguard High Dividend Yield ETF pays you 2.5%
As its name suggests, the Vanguard High Dividend Yield ETF focuses on dividend stocks that offer high yields. And by doing so, it can enable you to collect dividend income as well. At 2.5%, that means you could collect $500 per year in dividends if you invested $20,000 in the fund. But if the yield was closer to the S&P 500 average of 1.2%, then you'd need to invest close to $42,000 to get the same amount in dividends.
There are 580 stocks in the ETF, which gives you exposure to an abundance of different companies. Three of its top holdings include big-name dividend stocks such as Johnson & Johnson, AbbVie, and ExxonMobil. These stocks are known for being reliable income-generating investments, and these are the types of blue-chip companies you can expect to find in the ETF. But individually, those stocks account for no more than 2% of the fund's overall holdings.
The largest position the ETF has is in Broadcom, which accounts for nearly 7% of the portfolio. While the tech stock's yield is a bit modest at less than 1%, the company has aggressively raised its payouts in recent years. And if not for its mammoth 860% gains over the past five years, its yield would be a whole lot higher than it is right now.
Minimal fees mean more income and larger gains for your portfolio
Many investors know that when it comes to Vanguard funds, the diversification is usually high, but the fees are not. With this ETF, the expense ratio is just 0.06%, which is among the lowest that you'll find. It means on an investment of $10,000, your fees would total just $6 per year. Since the fees rise along with the portfolio's value, it's important to focus on ETFs that have low expense ratios to ensure that expenses aren't making a big dent in your overall returns.
And those costs can be critical, given that with dividend-focused ETFs such as this, since you're often sacrificing some gains in exchange for stability and income, you don't want to make those returns any lower. Over the past decade, the Vanguard High Dividend Yield ETF has risen by 118%, and that rises to nearly 200% when including dividends. By comparison, the S&P 500 has risen by 230%, and its total returns with dividends come in at more than 290%.
To put that in terms of dollars, a $10,000 investment would have grown to be worth over $39,000 by simply mirroring the S&P 500, but just $30,000 with the Vanguard fund. This includes dividends but doesn't include fees. If you were to incur $100 per year in fees (which would be the case if the fund's expense ratio was 1%), over a decade, that would strip away $1,000 from your overall return. And realistically, as your portfolio rises in value, so too will those costs. That's why investing in a low-cost ETF should be a priority when holding on for the long haul.
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The Vanguard fund is a quality investment to build your portfolio around
Whether you want dividend income or just a diversified investment that you won't have to worry about, the Vanguard High Dividend Yield ETF can be an excellent option for your portfolio. It can make for a great pillar that you invest the majority of your portfolio's funds into. With a great yield and some terrific stocks making up its holdings, it's a good example of a safe investment that you can feel comfortable putting a lot of money into.
