While the number of exchange-traded funds (ETFs) dedicated to dividend stocks continues to grow, some of the group's oldest members still merit consideration by income investors. One of the most popular is the Vanguard High Dividend ETF (VYM). As of the end of August, VYM had nearly $19 billion in assets under management, making it one of the largest dividend ETFs and one of the biggest smart beta ETFs. VYM tracks the FTSE High Dividend Yield Index, which is a collection of stocks with high dividend yields. However, VYM takes a different, quality-based approach to high-dividend stocks.
The Vanguard ETF has a trailing-12-month dividend yield of 2.91%, which is not alarmingly high. Sure, that is higher than the dividend yield on the S&P 500 or the yield on 10-year Treasuries, but there are other dividend ETFs and asset classes with higher yields than VYM. Additionally, high yields, while seductive, are not always a positive trait. (See also: >The Risks of Chasing High-Dividend Stocks.)
"The highest-yielding stocks could be under financial distress and more likely to cut their dividends than their lower-yielding counterparts," according to Morningstar research. "Many of these stocks pay out a large share of their earnings as dividends, leaving a small buffer to cushion these payments if their business deteriorates."
For its part, VYM skimps on some of the highest-yielding sectors. The ETF features no real estate exposure and allocates just 13.2% of its combined weight to the utilities and telecommunications sectors. By comparison, VYM's 14.3% weight to technology stocks, its largest sector weight, exceeds the fund's combined utilities and telecommunications exposure. (See also: >Total Return Review of High Dividend Yield ETF.)
"Although the fund targets high-yielding companies, its market-cap-weighting approach helps it to effectively diversify the risk of solely focusing on yield. In fact, its portfolio represents nearly 38% of the holdings in the Russell 3000 Index," according to Morningstar. "And while the fund has meaningful exposure to a few of its largest holdings, they are not among its riskiest positions."
VYM holds 406 stocks with a median market value of $129.6 billion, confirming its status as a large- and mega-cap fund that tilts heavily to reliable dividend payers. Several of VYM's top 10 holdings, including Dow Jones Industrial Average components Johnson & Johnson (JNJ) and The Procter & Gamble Company (PG), have some of the longest dividend increase streaks in corporate America. (See also: >5 Cheap Dividend ETFs for an Uncertain Market.)
VYM "outpaced its average large-value Morningstar Category peer by 1.5% annually from its inception in November 2006 through August 2017 and had a more-favorable risk profile to boot," notes Morningstar. "This was attributable to its greater exposure to consumer defensive stocks, smaller exposure to financials stocks, and more-favorable stock exposure within several sectors." (See also: >An ETF Sequel Worth Talking About.)
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