Exchange Traded Funds (ETFs)

Low Bond Yields Open the Door to Dividend Funds

The Vanguard High Dividend Yield ETF (VYM) tracks the common stocks of companies that pay higher-than-average dividends, making it a viable exchange-traded fund (ETF) pick for when market conditions are uncertain.

Two major factors are making dividends a popular investment focus right now. First, with bond yields at historic lows, many investors are turning to dividends as an alternate source of constant income. Second, geopolitical tensions and frustration at the lack of progress on growth initiatives from the Trump administration continue to keep investors in a “wait and see” mentality.

VYM uses a conservative, diversified approach that seeks above-average yields without exposure to excessive risk. This is evident in the fund’s very low 0.01% spread. VYM has a massive $18.82 billion in total assets under management and a very healthy $56.91 million in average daily trading volume.

VYM screens and ranks companies based on the forecast of their dividends over the next 12 months, selecting only those which rank in the top half. The ones that make the cut are then weighted by market capitalization, rather than dividends.

As an additional measure, the fund excludes real estate investment trusts (REITs) because of unfavorable tax rules. As dividend-paying stocks themselves offer some downside protection (since they tend to fare better during corrections and recessions than other equities), investors in VYM may be able to reduce their risk without having to sacrifice extra income in the process.

The fund has an expense ratio of 0.08%, which is 92% lower than the average expense ratio of funds with similar holdings. VYM offers a distribution yield of 2.91%. Overall, the cheap holding cost, the robust liquidity and the excellent tracking makes VYM a decent choice for investors seeking high dividend equity exposure.

Year to date, VYM has returned 6.14%, compared to the S&P 500’s 11.40%. This does not include dividends. However, VYM is up nearly 15% from its low of $69.96 on November 4, 2016.

The fund’s top five holdings are Microsoft Corp (MSFT), 5.8%; Johnson & Johnson (JNJ), 3.8%; ExxonMobil Corp (XOM), 3.6%; JPMorgan Chase & Co. (JPM), 3.4%; and Wells Fargo & Co. (WFC), 2.6%. As a well-diversified fund, VYM holds more than 400 stocks and is about equally invested in technology, consumer goods, financials, health care and industrials.

For those seeking stable high dividend payouts for at least the next year, the Vanguard High Dividend Yield ETF (VYM) may be worth adding to your portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.