Vanguard has made it easy for anyone to passively invest for the long term. The investment manager offers a broad range of low-cost funds.
The Vanguard High Dividend Yield ETF (VYM 0.24%) is one of its many excellent long-term holdings. This fund stands out due to its focus on higher-yielding dividend stocks. These companies offer investors income and typically deliver solid total returns with less volatility than the broader market. This combination makes the fund one that you could buy this October, and then hold for the rest of your life.
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A look at the Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF aims to track the performance of the FTSE High Dividend Yield Index, which measures the investment returns of companies that pay high-yielding dividends. Nearly 580 companies currently comprise this index, all of which the Vanguard High Dividend Yield ETF holds.
The fund charges a very modest 0.06% ETF expense ratio to provide investors with broad exposure to high-yielding dividend stocks. That would cost an investor about $0.60 per year for every $1,000 invested in the fund, a small price to pay for passive exposure to higher-yielding dividend stocks.
The fund collects dividends from its holdings and distributes this income to investors quarterly. The ETF has a 2.5% dividend yield based on annualizing its most recent payment. This yield is over twice that of the S&P 500 (^GSPC 0.54%), which is near a record low, currently less than 1.2%.
To put that into perspective, at a 2.5% yield, every $1,000 invested in the Vanguard High Dividend Yield ETF would produce about $25 of dividend income each year. That compares to less than $12 on a similar investment in an S&P 500 index fund due to its lower yield. That additional dividend income will really add up over the years.
The power of investing in high-yielding dividend stocks
The ETF's focus on dividend stocks is worth highlighting because they have proven to be powerful wealth creators over the long term. For example, if a hypothetical investor put $10,000 into an S&P 500 index fund in 1960, the value of their investment would have grown to more than $980,000 by the end of last year on price appreciation alone. However, when we add in reinvested dividends, the value of their account would have ballooned to nearly $6.4 million.
Another noteworthy feature of dividend-paying stocks is that they have delivered higher total returns with less volatility compared to non-dividend-paying stocks. Since 1973, the average dividend stock in the S&P 500 has delivered a 9.2% average annual total return, with a beta of 0.94, according to data from Ned Davis Research and Hartford Funds. For comparison, non-payers have returned 4.3% annually, with a beta of 1.17.
Also of note for this particular fund, companies with higher yields tend to outperform more frequently. Data from Wellington Management and Hartford Funds shows that companies with a higher dividend payout ratio (typically those with higher yields) have outperformed the market more than 60% of the time on average, a higher percentage compared to those with lower payout ratios. This is likely due to the impact of their higher dividend income on long-term performance.
All of this data on dividend-paying stocks bodes well for the Vanguard High Dividend Yield ETF. It holds companies that have historically delivered above-average returns with less volatility. Those qualities make the fund an excellent choice for long-term investment, as it should be able to steadily grow in value as its underlying holdings pay dividends and appreciate in value.
A forever ETF holding
The Vanguard High Dividend Yield ETF is an ideal fund to buy this month and hold for the long term. It invests in higher-yielding dividend stocks, which have historically produced strong total returns with less volatility. Those features make the fund a lower-risk way to grow and protect your wealth over the long haul.
