Low Bond Yields Open the Door to Dividend Funds

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

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.

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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.

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