Vanguard High Dividend Yield ETF (NYSEMKT:VYM) It has a dividend yield of 2.7%. It may not seem like a high yield, but it’s more than double the average stock in the market. S&P 500 (SNPINDEX: ^GSPC)which yields just under 1.2%. That comparison is really interesting in another way and highlights the value that the Vanguard High Dividend Yield ETF offers, even if you only have $200 to invest right now.
The first thing investors should understand about any exchange-traded fund (ETF) they purchase is the investment approach. These are bundled investment products, so you are actually 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, meaning it simply mimics an index. That index is the FTSE High Dividend Yield Index.
The FTSE High Dividend Yield Index is quite simple. The first step in creating the index is to select all the companies that pay dividends on the US stock exchanges. The second step is to align all those companies by performance, from highest to lowest. The third step is to include the top 50% performers in the index.
The index is weighted by market cap, so the largest stocks have the biggest impact on performance. This is fairly easy to understand and clearly focuses investors on the highest-performing stocks. The cost of all this is a small expense ratio of 0.06%.
Some dividend investors might balk at this point, wondering how an ETF designed to buy the highest-yielding stocks can have a yield that actually looks quite modest on an absolute level. The answer comes down to the number of stocks that are included in the portfolio.
Like the S&P 500, the Vanguard High Dividend Yield ETF has about 500 stocks. While they all pay dividends, the index it tracks actually falls pretty low in the yield range of all dividend-paying stocks. You have no choice, given the large number of stocks that pay dividends.
But here’s the interesting thing: Until a few very large companies started dominating the S&P 500’s returns, the Vanguard High Dividend Yield ETF tracked the market’s performance quite closely, as highlighted in the chart. Given the highly diversified portfolio it holds, this is not surprising. This suggests that for a dividend investor, this ETF could be swapped for the S&P 500 as a primary stock portfolio. Right now might even be a good time to consider a trade, given the dynamics driving the S&P 500 today.