Vanguard High Dividend Yield ETF (VYM) 2024 Review
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The Vanguard High Dividend Yield ETF (VYM) serves as the counterpart to the Vanguard Dividend Appreciation ETF (VIG), which I reviewed last week and rated highly for its risk-adjusted returns, solid diversification, low fees, and strong exposure to quality factors.
But how does VYM stack up, especially for those investors specifically seeking higher income through dividends? Today, I'll break down the aspects of VYM that might make it an appealing option for your investment portfolio—or reasons you might want to look elsewhere.
VYM: What I like
As with VIG (and most Vanguard ETFs), one of VYM's standout traits is its impressively low fee structure. At a 0.06% expense ratio, this ETF is extremely affordable—only $6 annually for every $10,000 investment, which helps minimize the drag on your long-term net returns.
I'm also a fan of VYM's benchmark, the FTSE High Dividend Yield Index. This index excludes real estate investment trusts (REITs), removes any companies that haven't paid a regular dividend in the last 12 months or aren't forecasted to pay one, and ranks the remaining stocks by their forward dividend yield. Then they're weighted by market capitalization.
The result? You get a pretty diversified portfolio of around 550 blue-chip dividend stocks, with tilts towards more "old economy" sectors: consumer staples, energy, financials, and industrials.
These criteria give VYM some clear advantages. First, its 30-day SEC yield of 2.63% is about double that of the S&P 500. Second, its portfolio turnover is very low at just 5.7%, meaning there's minimal churning, which helps keep costs down and tax efficiency up. Moreover, the exclusion of REITs gives the distributions from VYM qualified dividend status, which is also favorable for taxes.
Finally, VYM provides strong exposure to the value factor, making it effectively a large-cap value fund with a higher-dividend tilt. Remember – I buy dividend ETFs not for the income, but for cheap, effective factor exposure, and VYM does a great job here.
We can see this in action through a factor regression comparing VYM to the Vanguard Value ETF (VTV) and the Vanguard S&P 500 ETF (VOO). VYM has significant loadings to the value factor (HML), similar to VTV, but also shows loadings to quality factors like profitability (RMW) and investment (CMA).
While VYM has underperformed VOO in recent years, I'm not concerned—growth stocks have dominated the last two decades. What matters is that VYM has kept pace in terms of total returns and even outperformed VTV on a risk-adjusted basis.
In essence, VYM offers excellent value exposure and is well-positioned to outperform if and when the value factor makes a comeback.
VYM: what I dislike
As solid as VYM is, there are a few aspects I'm not keen on. First, its market-cap weighting could be seen as a missed opportunity. While it helps ensure a bias towards large-cap stocks, it seems contradictory for a dividend-focused ETF.
After sifting through to find the top 55% of stocks by forward dividend yield, it then weights these stocks by size, not by dividend characteristics. A fundamental weighting method based on dividend yield or total dividend payment could better emphasize the value aspect, enhancing the fund's appeal to those seeking income-focused investments.
The screening criteria also strike me as somewhat narrow. Aside from excluding REITs to improve tax efficiency and selecting stocks based on their yield, there isn't much depth.
Ideally, I would have liked to see additional layers, such as excluding stocks with the very highest yields that might indicate dividend traps or setting a maximum payout ratio to ensure dividend sustainability.
Lastly, those specifically chasing high yields might find VYM underwhelming. Its 2.63% 30-day SEC yield is modest compared to more aggressive income-focused funds.
While I don’t primarily invest in ETFs for their yield—so this isn't a dealbreaker for me—it could be a significant downside for investors who rely on their investment income for things like retirement withdrawals.
VYM: My verdict
VYM scores a solid 8.5 out of 10 for me. Its low fees, extensive portfolio, strong value and quality factor exposure, and tax-efficient dividend distributions are major pluses.
However, I'm less enthusiastic about its relatively simplistic index methodology and the market-cap weighting, which I feel could be better optimized to emphasize value traits.
For those looking to shore up the weaknesses of VIG, pairing it with VYM could be a strategic move. Together, they provide a balanced approach, capturing both high dividend yield and consistent dividend growth, with overlapping quality factor exposure.
Notably, these two ETFs currently share 181 holdings, representing 53.9% of VIG's and 33.6% of VYM's portfolios respectively.
In my opinion, these stocks represent the "cream of the crop," meeting both the forward yield criteria of VYM and the dividend growth criteria of VIG, making this combination a powerful tool for diversified dividend investing.