Is the Vanguard High Dividend Yield (NYSEARCA:VYM) ETF A Good Buy? (2024)

VYM Overview

The Vanguard High Dividend Yield ETF (NYSEARCA:VYM) is a diversified high dividend yield equity index ETF.

VYM tracks the FTSE High Dividend Yield Index, an index of these same securities. It is a simple index, which invests in the highest-yielding large-cap U.S. equities. Comparatively low-yielding equities are specifically excluded from the fund. Securities are also subject to a basic set of liquidity, trading, etc., criteria, but these are quite lax. If the stock is large and has an above-average dividend yield, it will very likely be included in the index.

VYM's investment strategy and holdings provide investors with several important benefits and drawbacks. Let's have a look at these, starting with the benefits.

Benefits and Investment Thesis

Diversified Holdings

VYM's underlying is quite broad, which results in a well-diversified fund. VYM invests in 412 securities, with the top ten of these comprising just 23.3% of its value.

(Source: VYM Corporate Website)

As can be seen above, VYM's larger holdings are generally blue-chip dividend stocks, and popular, well-known names in the SeekingAlpha dividend investing community. These include Johnson & Johnson (JNJ), Pfizer (PFE), and Verizon (VZ). These same companies tend to have strong, resilient business models, and safe, growing dividends, a benefit for the fund and its shareholders. VYM's holdings seem particularly appropriate for more conservative, long-term dividend investors, for whom safe, stable, growing dividends are paramount.

VYM's holdings are also reasonably well-diversified across industry segments.

(Source: VYM Corporate Website)

VYM's diversified holdings significantly reduce portfolio risk and volatility, and are a significant benefit for the fund and its shareholders. VYM's diversification is such that the fund could function as a core portfolio holding for most investors.

There is one important caveat to the above.

Although VYM provides exposure to most relevant industry segments, it is significantly underweight tech. As an example, a quick comparison of VYM's industry allocations versus those of the S&P 500.

(Source: Vanguard Corporate Website - Chart by author)

As can be seen above, VYM's industry weights are roughly similar to those of the S&P 500, with a couple of difference. The most significant difference, by far, is the fact that VYM is massively underweight tech, as said industry rarely pays strong dividends. Tech companies tend to prefer to retain earnings for future growth, or to return cash to investors in the form of share buybacks, over dividends. Tech companies that do pay dividends tend to have low dividend yields, for the very same reason. As an example, Apple (AAPL) yields 0.57%, while Microsoft (MSFT) yields 0.74%.

Due to the above, VYM lacks exposure to several large, important tech companies. These include most mega-cap tech names, including Apple, Microsoft, Amazon (AMZN), Google (GOOG), and Facebook (FB).

In my opinion, due to the size and relevance of the tech industry, investors should strongly consider pairing VYM with a tech fund, or with a couple tech securities. Doing so would ensure a more well-rounded portfolio, decreasing risk and volatility.

In any case, VYM's diversified holdings are a benefit for the fund and its shareholders, notwithstanding being underweight tech.

Comparatively High 2.7% Dividend Yield

VYM focuses on high dividend yield equities, which results in a fund with a comparatively strong 2.7% yield. It is not a high yield on an absolute basis, but it is definitely higher than that of broader equity index funds.

VYM's dividend yield is only marginally higher than that of broader equity indexes because VYM's index is quite broad. Remember, the fund invests in the highest-yielding large-cap U.S. equities. The average U.S. equity yields about 1.2%, as per the S&P 500. Very roughly, VYM invests in equities with yields higher than 1.2%. This is a very low cutoff, and explains why the fund's dividend yield is only slightly higher than average.

VYM's dividend growth track record is also quite strong, with the fund's dividend growing at a 9% CAGR for the past decade. Growth tends to be quite consistent too, although it has moderated these past few years.

(Source: SeekingAlpha)

As a comparison, VYM's dividend growth is roughly comparable to that of the S&P 500.

(Source: SeekingAlpha)

The fund's dividend is also reasonably safe. Dividend cuts are rare, but not unheard of. VYM's dividend was last cut in 2010, during the aftermath of the financial crisis. Depending on how it's measured, the fund's dividend recovered in 1-3 years, and it has seen uninterrupted dividend growth ever since.

(Source: SeekingAlpha)

VYM's strong dividend growth is a benefit for all investors, but particularly important for long-term dividend growth investors. Investing in VYM today should result in significant income in the years, and decades, to come. As an example, VYM sports a strong 7.0% 10-year yield on cost. Reinvest the dividends, and yields would go even higher.

(Source: SeekingAlpha)

As a comparison, the S&P 500 has a 10-year yield on cost of 4.7%, moderately lower.

(Source: SeekingAlpha)

Due to the strength, size, and resiliency of most of VYM's holdings, I think future dividend growth is likely. That has been the case for most of the fund's history, and conditions have not materially changed in the recent past.

VYM's dividend yield and dividend growth are both reasonably good, and combine to create a fantastic long-term investment for dividend investors.

Competitive Valuation

VYM offers investors a competitive valuation, with the fund sporting a lower PE and PB ratio than broader U.S. equity index funds. On the other hand, the fund does sport a more expensive valuation than international equity index funds.

(Source: SeekingAlpha)

VYM's competitive valuation could plausibly lead to strong capital gains if valuations were to normalize / equalize, benefiting shareholders.

Importantly, VYM's cheaper valuation is not due to weakness in the fund's underlying holdings, at least not in most cases. VYM's holdings have seen comparable dividend growth to those in the S&P 500, and for more than a decade. These are not excessively risky or low-growth companies, but safe companies with growing dividends.

VYM offers investors a comparatively strong dividend yield, good dividend growth, and strong potential capital gains. Although the fund does not excel in any one of these, the combination is quite strong.

VYM Risks and Drawbacks

Little Tech Exposure

VYM's most significant negative is the fund's small tech exposure. As mentioned previously, tech accounts for 7.8% of the value of the fund, versus 27.8% for the S&P 500. VYM does not invest in some of the largest U.S. equities, including Apple, Microsoft, and Google, while the S&P 500 does. Other broad U.S. equity indexes have greater tech exposure too.

(Source: Vanguard Corporate Website - Chart by author)

VYM's small tech exposure means the fund is less diversified than it could be, which increases risk and volatility. Specifically, the fund is likely to underperform when tech outperforms. Which brings me to my next point.

Consistent Underperformance

VYM's dividend yield and dividend growth track record are quite strong, but the fund's total shareholder returns are quite weak. The fund generally underperforms relative to the S&P 500, and to an all-cap U.S. equity index too.

(Source: SeekingAlpha - Chart by Author)

Interestingly, VYM really only started to underperform broader indexes starting from 2019 on out. The fund had mostly tracked these indexes before.

VYM started to underperform from 2019 on out, because tech started to significantly outperform at around the same time. As the fund is underweight tech, it saw few gains from the tech bull market, while broader equity indexes saw comparatively greater gains.

In my opinion, and due to the above, investors should strongly consider pairing VYM with a tech-focused fund. Doing so would increase diversification, reduce portfolio risk and volatility, and ensure stronger returns when tech outperforms. VYM's lack of tech exposure, and the performance issues this causes, are the fund's most significant negative, but are easy one to solve.

Alternatives to VYM

Although I think VYM is a good fund and long-term investment opportunity, it could be much better. A great dividend U.S. equity fund would be similar to my top two global equity funds, the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) and the Lazard Global Total Return & Income Fund (LGI), but focusing on equities. Both funds offer investors strong tech exposure, higher +6.0% distribution yields, and market-beating returns. Both have also outperformed VYM, and its international counterpart, since inception, and for most relevant time periods.

ETO and LGI are quite different from VYM, so the comparison is not completely fair, but I do think it is constructive. Some funds manage to combine diversification, strong yields, and market-beating returns. VYM is not one of these funds. Ideally, investors would choose a fund with similar characteristics to ETO and LGI, but focusing on U.S. equities, instead of VYM. I have not been able to find such a fund, at least not one without other glaring weaknesses, negatives, or significant differences.

Conclusion: Is VYM a Good Long-Term Investment?

VYM's diversified holdings, comparatively strong 2.7% dividend and dividend growth track record, and cheap valuation make the fund a buy, and a good long-term investment.