Researching Dividend ETFs? Look to This Play

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. Up more than 6% year-to-date, VYM provides investors with exposure to sectors that are delivering impressive dividend growth.

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. While VYM is advertised as a high-yield dividend ETF, the truth is the fund takes steps to mitigate some of the risks associated with high-yield stocks.

“High-yielding stocks usually pay out an above-average share of their earnings in the form of dividends, leaving a smaller buffer to preserve dividend payments should earnings fall,” said Morningstar. “Although the fund targets high-yielding companies, its market-cap-weighting approach helps it to effectively diversify the risk of solely focusing on yield. In fact, its portfolio represents nearly 38% of the holdings in the Russell 3000 Index. And while the fund has meaningful exposure to a few of its largest holdings, they are not among its riskiest positions.”

While no dividend ETF can guarantee that some of its holdings will not cut dividends at some point, VYM’s lineup heavily tilts toward large- and mega-cap stocks. Many of the ETF’s holdings have long traditions of steadily rising dividends.

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