The Federal Reserve could boost interest rates later this year, but that move may not hinder dividend stocks and exchange traded funds as much as some income investors think. Additionally, dividend growth stocks could prove particularly sturdy in the event of an interest rate increase.
Stocks with steady dividend yields reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.
The Vanguard High Dividend Yield ETF (NYSEArca: VYM) has been solid during some trying times for dividend stocks and ETFs. VYM is one of the four largest U.S. dividend ETFs and one of the least expensive as well.
Related: Low U.S. Interest Rates Boost International Dividend 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 nearly a quarter 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.
[related_stories]VYM charges just 0.09% per year, making it less expensive than 92% of comparable funds.
“Investors looking deeper into the portfolio will see Wal-Mart (NYSE: WMT) at #21. Wal-Mart’s shares remain cheap in my book. The company can rapidly grow earnings per share by buying back stock. The only way for that strategy to falter is if earnings and cash flows in future years declined so that the forward earnings yield was lower than the trailing earnings yield,” according to a Seeking Alpha analysis of VYM.
SEE MORE: The Right Dividend ETFs for Rising Rates Protection
With stocks near record highs and some valuations stretched, investors should consider high-quality stock exposure, such as exchange traded funds that track dividend growers, as a way to limit risks while participating in any upside potential.
Investors may also consider consistent dividend growers as a way to gain exposure to this group of quality companies as dividend growers and high quality stocks share a number of similar characteristics.
“VYM is an excellent ETF with a great expense ratio. However, most of the domestic equity market has seen share prices rise to the point where there just isn’t much potential left for growth unless corporate profits grow substantially faster than GDP or P/E ratios across the economy reach absurd valuations,” adds Seeking Alpha.
For more news and strategy on the Equity ETF market, visit our Equities category.
Vanguard High Dividend Yield ETF
