Experienced investors recognize that there are significant differences between a security's price and its intrinsic value, but perceptions of affordability will always be alluring to some market participants.
Everyone likes a good deal or unearthing what looks like a bargain, but the search for low price tags can deter some prospective investors from getting into the game. Fortunately, exchange-traded funds (ETFs) are helping investors alter that thinking. In fact, one of the biggest reasons many market participants, including those in younger demographics, are flocking to ETFs is the ability to invest with small amounts of capital.
This high-dividend ETF is one to consider for investors with small amounts of capital. Image source: Getty Images.
Drilling down on some specifics, say you've got $200 in excess cash in your wallet, and you want to tap the long-term benefits of dividend income. The Vanguard High Dividend Yield ETF (VYM +0.00%), which closed at $141.01 on Nov. 14, is a great place to start.
NYSEMKT: VYM
Key Data Points
What sets this Vanguard ETF apart?
With basic S&P 500 (^GSPC +0.25%) ETFs yielding just 1.14%, finding dividend yields in excess of that number isn't difficult. The low yield on the benchmark U.S. equity index also implies that what constitutes "high dividend" is a matter of perspective.
Indeed, this Vanguard ETF sports a 30-day SEC yield of 2.47%, which is impressive relative to broad market indexes. Conversely, it can be said that this ETF's yield is merely middling compared to some competitors in the high-yield dividend ETF category.
What isn't middling is this Vanguard fund's stout five-year run against some of its nearest rivals.
A primary driver of this $66 billion ETF's outperformance is its status as a departure from the high-yield dividend ETF norm -- that being often large allocations to sectors known for above-average payouts, namely consumer staples and utilities.
While it's nice that consumer-packaged goods and utilities stocks deliver big dividends, those sectors serve as reminders that in investing, there are no free lunches. When accessing those sectors' tempting payouts, investors sacrifice growth because staples and utilities are defensive, slow-growth sectors.
That is to say that the fact that the Vanguard ETF devotes just 15.3% of its portfolio to those groups is potentially advantageous. Perhaps even more positive (and surprising) is this ETF's 14.1% weight to tech stocks -- a sector not often synonymous with high dividends.
This dividend ETF's tech exposure is above-average in the high-dividend category, and that's all right for multiple reasons. First, many mature large- and megacap tech companies are growing dividends. Second, this ETF's exposure to that sector enhances its return on equity (ROE) profile. The fund's ROE is 18%, implying its member firms aren't, broadly speaking, saddled with worrisome debt loads and are acting as good stewards of shareholder equity.
Oh yeah, this dividend ETF also excludes real estate investment trusts (REITs) -- a high-dividend asset class to be sure, but one known for being capital-intensive and sensitive to interest rates.
A good deal in other ways
For $200, an investor acquires almost 1.5 shares of this ETF. Alone, that might sound like a good deal, but upon closer examination, market participants may be grabbing an excellent deal with this fund.
For example, the ETF's methodology mitigates some of the risks associated with high-dividend investing, including exposure to financially fragile companies that could eventually become payout offenders through dividend cuts or suspensions.
And this Vanguard ETF charges just 0.06% annually, or $6 on a $10,000 investment. That's meaningful for investors who are starting small with an eye toward long-term portfolio building, because that low fee means holders of this ETF retain more of their hard-earned capital over extended holding periods.