While some high dividend strategies are lagging the broader market due to rising interest rates and investors’ preference more cyclical sectors, the Vanguard High Dividend Yield ETF (NYSEArca: VYM) remains a popular destination for income investors. VYM is one of the four largest U.S. dividend ETFs and one of the least expensive as well.
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’s “strategy basically targets stocks that represent the higher-yielding half of all U.S. dividend-payers, and then it weights its holdings based on market capitalization,” according to Morningstar. “What that does is it tends to skew the portfolio toward the most mature names in the market. These tend to have durable competitive advantages, and it has a bit less exposure to the more distressed, highest-yielding names in the market.”
On Demand Webcast: Why Commodity ETFs Should Be Part of Your Diversified Portfolio
VYM holds nearly 430 stocks and is diverse at the sector level as five groups – consumer goods, technology, financial services, healthcare and industrials – receive double-digit weights. Although it is a highd dividend ETF, high-yielding sectors such as telcom and utilities combine for less than 13% of VYM’s weight. Earlier this year, Vanguard lowered the annual fee on VYM by one basis point.
VYM tracks the FTSE High Dividend Yield Index and excludes real estate stocks. The ETF charges just 0.08% per year, or $8 on a $10,000 investment, making it less expensive than 92% of competing funds, according to issuer data.
“The really risky names are still a relatively small part of the portfolio. So, that’s a strategy that is very well constructed. We give it a Morningstar Analyst Rating of Silver, and it charges a very low 8 basis points expense ratio. So, it’s one of the lowest-cost dividend strategies on the market. So, that’s one that we really like,” according to Morningstar.
VYM’s dividend yield is 2.95%, or more than 100 basis points higher than what is found on the S&P 500. Up nearly 5% year-to-date, VYM resides about 0.6% below record highs.
For more on smart beta ETFs, visit our Smart Beta Channel.