For retirees and others seeking to supplement their income through dividends, the Vanguard High Dividend Yield ETF (VYM) offers an attractive option with broad diversification and low fees.
Why Dividends Appeal to Income Investors
With interest rates low and expected to stay that way for some time, generating substantial income from bonds and other fixed income investments is challenging. This has led many investors, especially those in or near retirement, to look to dividends from stocks and equity funds.
Dividend-paying stocks provide regular income without having to sell any shares, allowing the underlying assets to continue growing. This makes dividends an appealing way to supplement retirement income from Social Security and other sources.
Overview of VYM’s Strategy
VYM tracks the FTSE High Dividend Yield Index, which selects high dividend paying stocks from the FTSE universe and weights them by market capitalization. This gives larger companies more weight in the fund than smaller ones.
The fund holds around 450 stocks, providing broad exposure across many companies and sectors. The top sector represented is financials at approximately 20% of assets.
By focusing on high dividend payers, VYM structurally tilts towards value stocks over growth. These stocks often trade at lower valuations but generate substantial income.
Benefits of VYM for Income Investors
Here are some of the key benefits VYM offers for those seeking income through dividends:
1. High Current Yield
VYM’s 12-month yield is around 3.1% as of December 2023. While not huge in absolute terms, this is far higher than broad market indexes like the S&P 500, which yields approximately 1.4%. The meaningful yield VYM provides is a major draw.
2. Low Cost
With an expense ratio of just 0.06%, VYM is extremely cheap to own. Such low fees help maximize the income investors keep.
3. Diversification
Owning hundreds of stocks across many sectors mitigates company-specific risks. VYM provides a well-rounded portfolio of dividend payers beyond what most individuals could construct alone.
4. Stability
Large, established companies with steady profits are more likely to pay stable and growing dividends over time. VYM focuses on these types of firms.
5. Potential for Growth
In addition to income, VYM provides exposure to companies with potential for share price appreciation over time. The dividends and growth can combine to drive strong total returns.
Top 10 Holdings
Here are VYM’s top 10 holdings as of December 29, 2023:
| Company | Symbol | Total Net Assets |
|---|---|---|
| JPMorgan Chase & Co. | JPM | 3.36% |
| Exxon Mobil Corp. | XOM | 3.11% |
| Broadcom Inc. | AVGO | 2.98% |
| Johnson & Johnson | JNJ | 2.78% |
| Procter & Gamble Co. | PG | 2.70% |
| Home Depot Inc. | HD | 2.37% |
| Merck & Co. Inc. | MRK | 1.94% |
| AbbVie Inc. | ABBV | 1.88% |
| Chevron Corp. | CVX | 1.85% |
| PepsiCo Inc. | PEP | 1.73% |
The top 10 represent about 25% of the fund’s assets, so no single company dominates the portfolio. Exposure is spread across many well-known, large cap stocks.
Sector Exposure
As mentioned previously, VYM has its largest allocation to the financial sector at around 20% of assets. The fund’s other major sector components are:
- Financials (20.91%)
- Consumer Goods (12.46%)
- Industrials (12.25%)
- Health Care (11.71%)
- Consumer Services (10.53%)
- Oil & Gas (10.43%)
- Technology (9.86%)
- Utilities (6.74%)
- Basic Materials (2.53%)
- Telecommunications (2.10%)
The portfolio reflects a tilt towards sectors that historically pay higher dividends, with lower exposure to high growth sectors like technology that pay below average yields.
Who Should Consider Investing in VYM?
VYM can make sense for several types of investors:
- Retirees – Reliable dividends can provide steady income to live off in retirement.
- Income investors – Those focused on cash flow will appreciate VYM’s 3%+ dividend yield.
- Conservative investors – The stability and diversification reduce portfolio risk.
- Passive investors – Simple, low-cost access to hundreds of dividend payers.
- Near retirees – Balance income now with growth leading up to retirement.
Risks to Consider
While VYM offers benefits, there are also risks to consider:
- Rate sensitivity – If rates rise significantly, income stocks could underperform.
- Top heavy – Big allocations to a few sectors like financials reduces diversification.
- Vulnerable companies – Some may need to cut dividends in recessions.
- Portfolio overlap – Many income investors already own top holdings like JNJ.
Proper portfolio construction and rebalancing can help manage these risks.
The Bottom Line
With its high yield, diversified portfolio, low fees, and potential for capital appreciation, Vanguard’s VYM ETF is an attractive option for investors aiming to generate income through dividends. It provides a simple, low-cost way to implement this strategy across many companies and sectors. Investors seeking income should give VYM strong consideration.