Vanguard High Dividend Yield ETF (NYSEMKT: VYM ) has a dividend yield of 2.7%. This may not sound like a high yield, but it is twice the average of stocks S&P 500 (SNPINDEX: ^GSPC)That is yielding a little less than 1.2%. This comparison is actually interesting in another way, and it highlights the value that the Vanguard High Dividend Yield ETF provides — even if you only have $200 to invest right now.
The first thing an investor needs to understand about anything Exchange Traded Fund (ETF) is the investment approach they buy. These are pooled investment products, so you are essentially hiring someone else to handle the investment process for you. You have to make sure you know what they are doing.
Vanguard High Dividend Yield ETF is an index-based ETF, which means it only tracks an index. That is the index FTSE High Dividend Yield Index.
The FTSE High Dividend Yield Index is pretty simple. The first step in constructing the index is to select all dividend-paying companies on US exchanges. The second step is to line up all those companies by yield, from lowest to lowest. The third step is to add the highest yielding 50% to the index.
The index is market-cap weighted, so the largest stocks have the greatest impact on performance. It is very easy to understand and clearly focuses investors’ attention on the highest yielding stocks. The cost for all this is a small 0.06% expense ratio.
Some dividend investors may wonder at this point, wondering how an ETF designed to buy the highest-yielding stocks could have a yield that actually looks quite modest on an absolute level. . The answer boils down to the number of stocks being added to the portfolio.
Like the S&P 500, the Vanguard High Dividend Yield ETF holds about 500 stocks. While all of these pay dividends, the index it tracks actually pushes quite far down the yield range of all dividend-paying stocks. Given the sheer number of dividend-paying stocks it has no choice.
But here’s the interesting thing: Until a few very large companies began to dominate the S&P 500’s returns, the Vanguard High Dividend Yield ETF tracked fairly closely with the market’s performance, as highlighted in the chart. . Given the highly diversified portfolio it owns, this is not surprising. This suggests that, for a dividend investor, this ETF could be substituted for the S&P 500 as a core stock holding. Given the dynamics driving the S&P 500 today, now may still be a good time to consider a switch.
