The Vanguard ETFs With The Biggest Dividends (After Taxes And Fees)

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Includes: BIV, BLV, BND, BNDX, BSV, EDV, MGC, MGK, MGV, VAW, VB, VBK, VBR, VCIT, VCLT, VCR, VCSH, VDC, VDE, VEA, VEU, VFH, VGIT, VGK, VGLT, VGSH, VGT, VHT, VIG, VIGI, VIS, VMBS, VNQ, VNQI, VO, VOE, VOO, VOT, VOX, VPL, VPU, VSS, VT, VTEB, VTI, VTIP, VTV, VUG, VV, VWO, VWOB, VXF, VXUS, VYM, VYMI
by: John DeFeo

Summary

Calculating the yield of a fund is not as straightforward as it seems.

Some dividend information is unintentionally misleading.

Taxes and fees can dramatically alter the "net" yield of a fund.

I thought it would be easy to find a list of Vanguard exchange-traded funds (ETFs) ordered by dividend yield. Turns out, it isn't. You can find a list of ETFs on Vanguard's website, but it has shortcomings: First, you can't sort by dividend yield. Second, the international funds (even the ones with "dividend" in their name) don't have a published yield. Lastly, Vanguard only displays the "SEC yield" of a fund, which is a quirky calculation that's mandated by the U.S. Securities and Exchange Commission.

SEC yield looks at a fund's income over the prior 30 days and makes a hypothetical projection for the full year. It's a good standard for bond funds, but less useful for stock funds. Plus, there are caveats: Vanguard has six footnotes explaining the peculiarities of how they calculate yield. Nasdaq, Bloomberg and Morningstar's data is similar. After searching fruitlessly, I decided to make my own calculations.

Let me explain a few things before I share my research. Vanguard's ETFs hold stocks, bonds and real estate from around the world: They are not apples-to-apples investments. I ranked these funds by their yields out of curiosity, but I'd never buy a fund based solely on its dividend. Here's why:

  1. A dividend yield is only as good as the earnings that support it. If a fund's underlying investments can't support the payout, then the payout is reduced. You needn't look hard to find major fluctuations in the payouts that ETFs make.
  2. Not all dividends are created equally. Qualified dividends from common and preferred stocks are taxed at a lower rate than the distributions received from bonds or real estate. The same holds true for dividends paid by the ETFs that hold these investments.
  3. Investing in a "dividend growth" fund doesn't mean a bigger payout for you. Almost all investment funds change their stock holdings over time (the Corporate Leaders Trust Fund is a rare exception). If your fund exchanges a high-yield stock for one with a lower yield, your payout will go down. Always check to see if an investment lives up to its name.

These days, I prefer buying and holding dividend growth stocks rather than investing in funds. Nevertheless, ETFs are a useful tool and Vanguard's offerings are particularly compelling. You can buy or sell Vanguard ETFs without brokerage commissions as long as you have a Vanguard account. Those savings add up, especially for investors who make small investments or are just getting started. Also, the expense ratio of most Vanguard funds is a fraction of industry averages. You're nobody's fool if you choose to invest in ETFs rather than stocks.

So, back to my research. Here is how I calculated the highest-yielding Vanguard ETFs:

  • Each fund's yield is based on the dividend payout of the prior 12 months. I excluded capital gain distributions and returns of capital;
  • Next, I applied a hypothetical tax rate to the distributions for each fund using Vanguard's 2016 qualified dividend projections. Specifically, I applied the median federal tax rate (28%) for unqualified distributions and the corresponding rate (15%) for qualified dividends; and
  • Lastly, I subtracted the annual management fees (i.e. expense ratio) of each fund from the remaining yield.

These steps allowed me to rank these funds based on the "net" yield that an average investor might receive. Don't hang your hat on the data below. Dividends and prices fluctuate. My tax rate assumptions are a generalization; your personal circumstances are likely different. This list is simply a way to make relative comparisons between each ETF and then conduct your own research from there.

Highest-Yielding Vanguard ETFs After Taxes And Fees
Fund Expenses TTM Yield Qualified Div. % Net Yield
Emerging Markets Government Bond ETF (NASDAQ:VWOB) 0.34% 4.80% 0.00% 3.11%
Long-Term Corporate Bond ETF (NASDAQ:VCLT) 0.10% 4.38% 0.00% 3.05%
FTSE Europe ETF (NYSEARCA:VGK) 0.12% 3.58% 82.83% 2.84%
Long-Term Bond ETF (NYSEARCA:BLV) 0.09% 3.96% 0.00% 2.76%
Utilities ETF (NYSEARCA:VPU) 0.10% 3.31% 100.00% 2.71%
REIT ETF (NYSEARCA:VNQ) 0.12% 3.88% 0.00% 2.67%
International High Dividend Yield ETF (NASDAQ:VYMI) 0.30% *3.39% 80.77% *2.49%
High Dividend Yield ETF (NYSEARCA:VYM) 0.09% 2.93% 100.00% 2.40%
Global ex-U.S. Real Estate ETF (NASDAQ:VNQI) 0.18% 3.40% 24.94% 2.38%
Telecommunication Services ETF (NYSEARCA:VOX) 0.10% 2.83% 100.00% 2.30%
FTSE Developed Markets ETF (NYSEARCA:VEA) 0.09% 2.88% 76.11% 2.27%
Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) 0.10% 3.26% 0.00% 2.25%
FTSE All-World ex-US ETF (NYSEARCA:VEU) 0.13% 2.91% 71.19% 2.23%
Total International Stock ETF (NASDAQ:VXUS) 0.13% 2.88% 68.13% 2.20%
Energy ETF (NYSEARCA:VDE) 0.10% 2.63% 100.00% 2.13%
Mega Cap Value ETF (NYSEARCA:MGV) 0.09% 2.55% 100.00% 2.07%
Extended Duration Treasury ETF (NYSEARCA:EDV) 0.10% 2.95% 0.00% 2.02%
Value ETF (NYSEARCA:VTV) 0.08% 2.43% 100.00% 1.99%
FTSE All-World ex-US Small-Cap ETF (NYSEARCA:VSS) 0.17% 2.71% 53.93% 1.97%
Consumer Staples ETF (NYSEARCA:VDC) 0.10% 2.41% 100.00% 1.95%
FTSE Pacific ETF (NYSEARCA:VPL) 0.12% 2.39% 70.82% 1.82%
Long-Term Government Bond ETF (NASDAQ:VGLT) 0.10% 2.65% 0.00% 1.81%
FTSE Emerging Markets ETF (NYSEARCA:VWO) 0.15% 2.52% 39.09% 1.79%
Total World Stock ETF (NYSEARCA:VT) 0.14% 2.30% 81.06% 1.76%
Intermediate-Term Bond ETF (NYSEARCA:BIV) 0.09% 2.56% 0.00% 1.75%
Mega Cap ETF (NYSEARCA:MGC) 0.09% 2.14% 100.00% 1.73%
Total Bond Market ETF (NYSEARCA:BND) 0.06% 2.46% 0.00% 1.71%
Dividend Appreciation ETF (NYSEARCA:VIG) 0.09% 2.06% 100.00% 1.66%
S&P 500 ETF (NYSEARCA:VOO) 0.05% 1.98% 100.00% 1.63%
Large-Cap ETF (NYSEARCA:VV) 0.08% 1.95% 100.00% 1.58%
Mid-Cap Value ETF (NYSEARCA:VOE) 0.08% 1.91% 100.00% 1.54%
Total Stock Market ETF (NYSEARCA:VTI) 0.05% 1.86% 94.84% 1.52%
Financials ETF (NYSEARCA:VFH) 0.10% 1.95% 71.58% 1.48%
Tax-Exempt Bond ETF (NYSEARCA:VTEB) 0.12% *1.59% 0.00% *1.47%
Small-Cap Value ETF (NYSEARCA:VBR) 0.08% 1.84% 88.04% 1.46%
Industrials ETF (NYSEARCA:VIS) 0.10% 1.81% 100.00% 1.44%
Short-Term Corporate Bond ETF (NASDAQ:VCSH) 0.10% 2.10% 0.00% 1.41%
Materials ETF (NYSEARCA:VAW) 0.10% 1.78% 100.00% 1.41%
Mega Cap Growth ETF (NYSEARCA:MGK) 0.09% 1.49% 93.44% 1.16%
Mid-Cap ETF (NYSEARCA:VO) 0.08% 1.46% 92.48% 1.15%
Small-Cap ETF (NYSEARCA:VB) 0.08% 1.47% 81.50% 1.14%
Consumer Discretionary ETF (NYSEARCA:VCR) 0.10% 1.44% 100.00% 1.13%
Health Care ETF (NYSEARCA:VHT) 0.09% 1.39% 100.00% 1.09%
Mortgage-Backed Securities ETF (NASDAQ:VMBS) 0.10% 1.63% 0.00% 1.07%
Intermediate-Term Government Bond ETF (NASDAQ:VGIT) 0.10% 1.57% 0.00% 1.03%
Information Technology ETF (NYSEARCA:VGT) 0.10% 1.32% 100.00% 1.02%
Growth ETF (NYSEARCA:VUG) 0.08% 1.31% 92.37% 1.02%
Extended Market ETF (NYSEARCA:VXF) 0.09% 1.34% 72.41% 1.00%
Short-Term Bond ETF (NYSEARCA:BSV) 0.09% 1.43% 0.00% 0.94%
Total International Bond ETF (NASDAQ:BNDX) 0.15% 1.47% 0.00% 0.91%
International Dividend Appreciation ETF (NASDAQ:VIGI) 0.25% *1.30% 100.00% *0.85%
Small-Cap Growth ETF (NYSEARCA:VBK) 0.08% 0.99% 81.98% 0.74%
Mid-Cap Growth ETF (NYSEARCA:VOT) 0.08% 0.86% 93.44% 0.64%
Short-Term Government Bond ETF (NASDAQ:VGSH) 0.10% 0.80% 0.00% 0.48%
Short-Term Inflation-Protected Securities ETF (NASDAQ:VTIP) 0.08% *0% 0.00% *0%
Yields are calculated from closing prices on Nov. 11, 2016.

A few things struck me while preparing the data above:

  1. Taxes and fees add up. The highest-yielding funds look very different when you focus on the yield you get to keep. In the end, that's the only figure that matters.
  2. There is yield to be had abroad. I've glossed over international funds in the past, partly, because their yields aren't obvious, but I was surprised to see so many international funds with high net-yields (especially in light of their higher expense ratios).
  3. Things aren't always as they seem. A fund's name or its data presentation can give you a false first impression. Stay vigilant and happy investing!

*Four of the funds on this list were treated differently than the others. I gave the Short-Term Inflation-Protected Securities ETF a 0% yield because it seemingly hasn't made a dividend payout in the past year. I assumed that the Tax-Exempt Bond ETF's distributions are completely tax free, although in reality, the fund's tax structure is probably more complex. Finally, the International Dividend Appreciation ETF and the International High Dividend Yield ETF are less than a year old, so I used the last six months of dividends distributions to make a full-year projection.

Disclosure: I am/we are long VDC, VDE, VHT, VO, VTI, VSMAX, VMGMX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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