Amid fears that the Federal Reserve will soon raise interest rates, 2015 has been a tough year for some of the largest dividend exchange traded funds. However, the Vanguard High Dividend Yield ETF (NYSEArca: VYM) has been sturdy in a rough environment for dividend ETFs.
VYM offers additional leverage to the shareholder rewards theme via its 12.4% weight to the financial services sector. For example, Dow component J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) combine for 5.8% of VYM’s weight. J.P. Morgan Chase and Wells Fargo were among the large banks that passed the Federal Reserve’s recent stress tests, which allows the banks to boost buybacks and dividends. [Bank on These Bank ETFs]
It can be said that VYM belies its high-yield implication because the ETF’s exposure to the sectors investors view as yield destinations is relatively light. Staples, utilities and telecom combine for 26.8% of the ETF’s weight with over half that coming from staples names. That is to say that with its relatively light combined allocation to the telecom and utilities sectors, VYM is not as sensitive to rising interest rates as some utilities-heavy dividend ETFs are. [The Right Dividend ETFs for Rising Rates Protection]
With interest rates stuck near historical lows, retirees may find it harder to meet their income needs through bonds alone. Instead, more should think about adding dividend-paying stocks and related exchange traded funds to bolster yields.
The dividend stock plays may also enjoy dividend growth, along with capital appreciation, which could also help an investor maintain his or her nest egg longer. Consequently, with a larger portion of retirement money invested in dividend stocks, an investor would not be forced to withdraw, or sell off assets, from his or her portfolio as quickly to meet annual income needs, assuming if total yields fall short of the target 4% withdrawal rate. [ETF Options to Generate Income for Retirement]
“VYM has also featured great dividend growth the last several years. We need to see what the December dividend is, but using the trailing 12-month period (last raise announced 9/23/15), it grew 12.4% this past year, and has a 3-year average of 12.7%,” according to a Seeking Alpha post.
Vanguard High Dividend Yield ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.