Vanguard High Dividend Yield ETF: Mediocre Returns (NYSEARCA:VYM) (2024)

Introduction

The Vanguard High Dividend Yield ETF (NYSEARCA:VYM) offers investors a basket of 414 U.S.-based dividend-paying stocks. The ETF tracks the FTSE High Dividend Yield Index and charges an expense ratio of just 0.06%, making it an ultra-low-cost dividend solution for many investors. The ETF takes companies ranked by forward 12-month dividend yield and selects the top 50% by dividend yield. The fund then uses market-cap weighting to construct the portfolio. The result is a large diversified portfolio with a moderate dividend yield.

Sectors & Individual Holdings

VYM's holdings are spread among 10 sectors. The largest of which is financials, which 22% of the fund, nearly a quarter, is in. Consumer non-cyclical and healthcare come in the top 3 while technology is fourth at around 10% of the fund. Industrials, consumer-cyclicals, utilities, and energy make up the next few sectors with weightings between 5 and 10%, while basic materials and telecommunications round out the final two sectors at under 5%.

The top 10 individual holdings include financial companies like JPMorgan Chase (JPM) and Bank of America (BAC). Non-cyclicals like Johnson & Johnson (JNJ) and Procter & Gamble (PG) make the top 5, as well as one retailer, Home Depot (HD). Interestingly, Verizon (VZ), a telecom, makes the top 10 with a 1.74% weighting.

All in all, the top 10 make up a core of robust, solid, blue-chip companies. None of them are massively overweight, meaning no single company will have all that large of an impact on the ETF performance overall. While this means investors may not capture as much upside as being in an individual name, it also helps spread out and reduce risk in the event one company performs poorly.

The ETF in total has 414 holdings, so the bottom 405 make up just over 75% of the portfolio. This means the fund is moderately concentrated in the top 10 or 20 holdings, and the remaining companies will only be a fraction of one percent of the fund.

Fund Performance Relative To Peers

VYM holds only U.S. stocks. The international version of this ETF is the International Vanguard High Dividend Yield ETF (VYMI), which uses a similar method of equity selection but only invests in companies based outside the United States. Over the last year, the two ETFs have essentially stayed in lock-step with one another, both putting up around a 35% return over the past 12 months.

The dividend yields of these ETFs tell a bit of a different story. The international ETF's yield has generally always been just a bit higher than the U.S. ETF. Recently, however, the international ETF announced a quarterly distribution increase, bringing its yield to 3.42%. A considerably higher yield than that of the U.S. ETF at 2.78%.

Compared to other U.S. based dividend-focused ETFs, the Vanguard ETF has put up middle-of-the-pack performance. On a 1-year time frame, the ETF has returned a respectable 35%, well above the 21% returns of the iShares Core High Dividend ETF (HDV) but remains well below the returns of the Schwab US Dividend Equity ETF (SCHD) and the SPDR S&P500 High Dividend ETF (SPYD), which have returned almost 50% returns to investors.

On a longer 5-year timeframe, VYM again finds itself somewhere between SCHD and HDV, but has also put up better performance than SPYD.

As far as yields go, HDV and SPYD currently payout yields of 3.57% and 4.67% respectively. SCHD and VYM are lower at just under 3% each but have made up for a lower yield with better price performance over the last 5 years.

Takeaways

VYM is a solid low-cost dividend ETF holding a wide range of diversified companies. That said, I'd be hard-pressed to buy VYM over the Schwab ETF SCHD, which has historically outperformed with nearly an equivalent yield and an equivalent expense ratio. Of course, past performance is not indicative of future returns, but it does seem that SCHD uses a more refined process to select companies based on metrics such as ROE, cash flow, and 10-year dividend track records, as opposed to the more simplified and mediocre market-cap-weighted portfolio based almost entirely on dividend yield alone that VYM uses. VYM is more diversified with 414 holdings compared to just 99 in SCHD, but I would argue that 99 holdings is enough to achieve most, if not all, of the benefits of diversification. Ultimately, I don't think VYM is a bad ETF by any means, but I don't see how the ETF will generate much more than mediocre returns. I think investors willing to put in a little bit of extra work may find superior alternatives.

Lukas Wolgram