ETFs
Why I’m bullish on this popular dividend ETF
The Vanguard High Dividend Yield Index ETF (NYSEARCA:VYM) is one of the largest and most popular Dividend ETF in the market today, with $54.4 billion in assets under management (AUM). With a dividend yield of 3.0%, the ETF’s name may seem a bit misleading, but it is still a sound investment choice for income and general investors. I’m bullish on this Vanguard ETF because of its above-average yield, strong long-term performance, broad diversification, portfolio of highly rated dividend stocks, and ultra-low fees.
Additionally, if the market pulls back or investors move out of high-risk growth stocks and into more stable, defensive dividend stocks, VYM seems like a good place to be.
What is the strategy of the VYM ETF?
According to Vanguard, VYM “seeks to track the performance of the FTSE High Dividend Yield Index, which measures the investment return of ordinary shares of companies characterized by high dividend yields.”
VYM’s assets
With 556 securities, VYM offers investors great diversification. Additionally, its top 10 holdings represent 23.7% of assets, which is very manageable, meaning there is very little concentration risk to worry about here.
Below you can see an overview of Top 10 VYM Stocks using TipRanks’ Funds tool.
As you can see, the fund owns many well-known and proven dividend stocks like ExxonMobil (NYSE:XOM), Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ).
But its top holdings also include some stocks not immediately associated with dividend investing, such as Broadcom (NASDAQ:AVGO), which is more often considered a growth stock. However, Broadcom does pay dividends, and the combination of its stock price appreciation and dividends has led to incredible feedback So for its shareholders, it’s a good thing that VYM isn’t neglecting low-yielding stocks like Broadcom.
The fund is also well diversified across sectors. Financial services have the largest weighting (20.7%), followed by industrials (12.6%), healthcare (11.7%), consumer staples (11.1%), energy (10.6%) and technology (10.1%), which all have fairly similar shares. weightings.
Overall, I like VYM’s mix of traditional top-notch products dividend stocks with newer dividend stocks like Broadcom.
VYM’s main titles also have a formidable collection of smart scores. THE Smart Score is a proprietary quantitative stock rating system created by TipRanks. It rates stocks from 1 to 10 based on eight key market factors. A score of 8 or higher equates to an Outperform rating.
A staggering nine of VYM’s top 10 stocks have smart scores equivalent to an outperformance of 8 or higher. Additionally, Broadcom, ExxonMobil, Johnson & Johnson, Merck (NYSE:MRK) and Walmart (NYSE:WMT) all feature “Perfect 10” smart scores, meaning half of VYM’s top 10 titles achieve that coveted rating.
The story continues
VYM itself has an ETF Smart Score equivalent to an outperformance of 8.
VYM performance evaluation
VYM has been a solid performer over the years. As of May 31, the fund had achieved an impressive annualized return of 11.2% over a five-year period and a respectable annualized return of 9.6% over a 10-year period.
It should be noted that these returns are lower than those of the S&P 500 (SPX). For comparison, the Vanguard S&P 500 ETF (NYSEARCA: VOO) generated five- and ten-year annualized returns of 15.8% and 12.7%, respectively.
However, these double-digit (and near double-digit) annualized returns remain solid and have provided VYM investors with significant gains over the long term. For example, an investor who invested $100,000 in VYM 10 years ago would have $244,820 today.
Additionally, much of the broader market’s outperformance in recent years can be attributed to the phenomenal performance of just a handful of large-cap technology stocks (the much-discussed Magnificent 7).
For example, technology stocks have a weighting of 30.6% within VOO, compared to only 10.1% within VYM. If growth stocks and technology stocks pull back or investors shift to more defensive sectors, the gap between VYM and the broader market would likely narrow significantly, given the fund’s focus on stocks dividends and its preference for large-cap value stocks.
Note that VYM holdings are also a bit cheaper than the broader market. As of May 31, VYM’s portfolio traded at 18.5 times earnings, while the S&P 500 currently trades at 24 times earnings.
Above average dividend
As the name clearly suggests, VYM pays dividends and its yield is currently 3.0%. Although the return may seem a bit disappointing, given the phrase “high yield” in the fund’s name, it is still double the return offered by the S&P 500 (SPX). Additionally, VYM has a strong history as a dividend ETF, having paid dividends for 17 consecutive years since its inception in 2006 and increasing that dividend for the past 13 years.
Ultra-low expense ratio
VYM’s expense ratio is just 0.06%, making the fund a great deal for investors. This 0.06% expense ratio means that an investor investing $10,000 in the fund will only pay $6 in fees per year, a very reasonable amount.
Investing in low-cost ETFs like VYM actually helps protect investors’ nest eggs over time. For example, assuming the fund returns 5% per year over the next decade and maintains this current expense ratio, the aforementioned investor who invests $10,000 in VYM would only pay $77 in fees over 10 years.
Is VYM Stock a Buy, According to Analysts?
As for Wall Street, VYM earns a Moderate Buy consensus rating based on 345 Buy ratings, 185 Holds, and 27 Sell ratings assigned over the past three months. THE average price target for VYM stock of $131.94 implies an upside potential of 11.1% from current levels.
Takeaways for investors
I am optimistic about VYM as a solid choice that income and general investors can include in their balanced portfolios.
Although the fund’s yield is not as high as its name suggests, and although its returns have slightly underperformed the broader market, it has still produced near double-digit annualized returns over the course of the last decade, creating significant wealth for its holders, and its return is double that of the S&P 500.
I also like that the fund includes high dividend growth stocks, like Broadcom, that offer a good mix of performance and yield, instead of just focusing on the highest yielding stocks regardless or performance. Additionally, VYM’s top stocks are highly rated by TipRanks’ Smart Score system.
Additionally, it’s hard to go wrong with VYM’s extremely favorable expense ratio, which allows its investors to keep more of their money.
Overall, VYM is a well-rounded ETF that offers a decent yield, solid performance, significant diversification, and low fees, making it an attractive stock for investors. Finally, if the market, or growth stocks in particular, pull back, VYM and its strong portfolio of dividend stocks seems like a good place to be, in my opinion.