Title: Embrace Balanced Returns with Vanguard's High Dividend Yield ETF: It's About Strategic Approach, Not Just Yield
In the realm of exchange-traded funds (ETFs), the term "dividend yield" in an ETF's name is a magnet for income-seeking investors. However, just because an ETF's title carries the words "dividend" and "yield" doesn't guarantee it's the best option for those chasing high returns. This wariness is essential when researching the controversial Vanguard High Dividend Yield ETF (VYM), boasting a 0.16% management fee. Here's why some yield enthusiasts might find this ETF less than appealing.
The yield statistics of Vanguard High Dividend Yield ETF
Vanguard High Dividend Yield ETF boasts approximately a 2.8% dividend yield. A relatively noteworthy yield compared to the S&P 500 index's paltry 1.2%. Yet, there are other dividend-focused ETFs boasting even higher yields, such as the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) and SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD), boasting 3.4% and 4.1% yields, respectively. Put simply, Vanguard High Dividend Yield ETF seems to trail behind in the race for yield.
The disparity stems from the underlying methodology between these index-based ETFs, which essentially means that by purchasing the methodology, you're getting the results. This fundamental principle holds true for Vanguard High Dividend Yield ETF, too. However, the question arises: what's causing Vanguard High Dividend Yield ETF to lag in terms of dividend yield, despite its promising statistics?
The Vanguard High Dividend Yield ETF and the art of stock selection
Vanguard High Dividend Yield ETF approaches selection by building an investable universe composed of all U.S.-based dividend-paying stocks, excluding Real Estate Investment Trusts (REITs). This narrow list is then sorted according to yield, with the top 50% reserves claiming a spot in the ETF's portfolio.
Initial impressions suggest that Vanguard High Dividend Yield ETF is severe on yield, targeting high-yielding stocks. Upon closer inspection, the filters applied falter. Vanguard High Dividend Yield ETF's pool of potential investments is so vast that any company with a dividend, regardless of its yield, can find its way into the corporate roster. Consequently, there are over 500 stocks in the Vanguard High Dividend Yield ETF portfolio.
Effectively, the aforementioned strategy is more about diversification than yield. The reward is that you're dabbling in a multitude of stocks, but the downside is that the positive impact of high-yielding stocks is diminished by the inclusion of lower-yielding stocks, leading to a lower overall yield. This dilemma might not be of concern to those prioritizing diversification, but for yield-focused investors, there are likely better ETFs suited to the task.
The devil's in the details
Investors should always comprehend the nuts and bolts of their holdings. There's nothing untoward with Vanguard High Dividend Yield ETF. It executes its function, which is to create a diverse portfolio of dividend-paying U.S. stocks. However, if you are seeking to focus on a more select group of the highest-yielding dividend stocks across the market, Vanguard High Dividend Yield ETF may not be suitable. In such cases, dividend ETFs with fewer top-yielding holdings might be the better option.
When evaluating different investment options, some income-seeking investors may consider the Vanguard High Dividend Yield ETF due to its promising yield statistics. However, if maximizing dividend yield is a top priority, other dividend-focused ETFs like the Schwab U.S. Dividend Equity ETF or SPDR Portfolio S&P 500 High Dividend ETF might offer more appealing yields.
For those looking to invest in the Vanguard High Dividend Yield ETF, it's important to understand that the ETF's approach to stock selection prioritizes diversification over yield. While this results in a diverse portfolio, the inclusion of lower-yielding stocks can lead to a lower overall yield compared to other ETFs focused on top-yielding stocks.
