Vanguard Brings You High Dividend Yields
Summary
- Vanguard High Dividend Yield fund is a great option for a diversified market exposure and high yields.
- VYM has a current yield of 2.97% right now which is high for a diversified equity fund.
- This Vanguard fund does not invest in REITs which I appreciate as I choose my own investments in the sector.
- Vanguard High Dividend Yield ETF has correlated almost identical to the S&P 500 since its inception in 2006.
I like Vanguard funds
When looking at funds, Vanguard and Schwab are the two companies I keep an eye on. I appreciate the low expense ratios and believe they have options for most investors. Today, Vanguard brings you a high dividend yield ETF.
If an investor is seeking high yields, the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) offers a fantastic option compared to most domestic equity ETFs. The yield is a reflection of the underlying stocks in the fund. Given the weak yield of bonds, VYM is a good option for investors looking to have some of their portfolio in equity.
I see VYM as an option for investors who are looking to be invested in a major domestic index, but would like to be slightly more defensive than something like the S&P 500 (SPY). VYM also has the added benefit of a materially higher dividend yield. The current yield is at 2.97% which is on the low end of the fund from what I’ve seen. This is the first time I’ve noticed the fund dip under 3%. The drop in dividend yield is because the market overall is at all-time highs. The high dividend yield makes is suitable investment for investors seeking income
Strategy
Here’s the funds strategy from the Vanguard website:
I’m in favor of the exclusion of REITs. M ortgage REITs are where most of my research is done, so I like to choose my own individual investments. Over the last several months I’ve been in and out of preferred shares. Apollo Financial Real Estate (ARI) and Capstead Mortgage (CMO) are two of the companies which I owned preferred shares in and recently sold for large gains. Annaly Capital Management (NLY) had a preferred share dip into my buy zone recently but I didn’t have enough capital on hand to purchase shares.
Strategy and holdings
I do like the strategy of this fund and, for the most part, the holdings.
Here are holdings and sector weightings from Vanguard:
I believe this is a great sector diversification. For investors looking for more allocation to the utilities sector, they could look at Vanguard Utilities ETF (VPU) or Utilities Select Sector SPDR ETF (XLU). The utilities sector somewhat correlates to bond investments. Treasuries tend to have negative beta which can help reduce the total risk profile on a portfolio.
Digging deeper into the holdings
Here are the top 30 holdings of VYM:
Ticker | Name | Allocation | Div Yield |
(MSFT) | MICROSOFT CORP | 5.62% | 2.25% |
(JNJ) | JOHNSON&JOHNSON | 3.75% | 2.54% |
(XOM) | EXXON MOBIL CORP | 3.57% | 3.84% |
(JPM) | JPMORGAN CHASE | 3.16% | 2.13% |
(WFC) | WELLS FARGO & CO | 2.73% | 2.73% |
(GE) | GENERAL ELECTRIC | 2.58% | 3.67% |
(T) | AT&T INC | 2.53% | 5.30% |
(PG) | PROCTER & GAMBLE | 2.40% | 3.15% |
(PFE) | PFIZER INC | 2.11% | 3.84% |
(CVX) | CHEVRON CORP | 2.08% | 4.17% |
(VZ) | VERIZON COMMUNIC | 2.02% | 5.31% |
(KO) | COCA-COLA CO/THE | 2.00% | 3.33% |
(PM) | PHILIP MORRIS IN | 1.99% | 3.53% |
(MRK) | MERCK & CO | 1.92% | 2.98% |
(INTC) | INTEL CORP | 1.82% | 3.22% |
(PEP) | PEPSICO INC | 1.79% | 2.79% |
(CSCO) | CISCO SYSTEMS | 1.69% | 3.75% |
(MO) | ALTRIA GROUP INC | 1.58% | 3.29% |
(IBM) | IBM | 1.56% | 3.92% |
(MCD) | MCDONALDS CORP | 1.33% | 2.41% |
(MMM) | 3M CO | 1.30% | 2.24% |
(WMT) | WAL-MART STORES | 1.28% | 2.71% |
(AMGN) | AMGEN INC | 1.24% | 2.68% |
(ABBV) | ABBVIE INC | 1.14% | 3.55% |
(BA) | BOEING CO/THE | 1.12% | 2.81% |
(BMY) | BRISTOL-MYER SQB | 0.96% | 2.79% |
(GILD) | GILEAD SCIENCES | 0.91% | 3.00% |
(QCOM) | QUALCOMM INC | 0.89% | 4.12% |
(TXN) | TEXAS INSTRUMENT | 0.88% | 2.55% |
(LMT) | LOCKHEED MARTIN | 0.88% | 2.55% |
Anyone who has followed my articles should know I’m not a fan of Microsoft. The last time I took a look at this fund MSFT was around 3.5% of the portfolio. Now at 5.62% I believe it holds too much weight – especially in a fund with 428 holdings. On top of being the #1 stock in this portfolio, which is designed around having a strong yield, it only carries a 2.25% dividend yield.
Alternatives?
I have both PM and MO in my portfolio right now and think they are good investments. Unfortunately, the market began to agree with me over the winter. MO and PM both rallied significantly beyond my target prices for buying. I would gladly see 2% come off of Microsoft and bring both these investments up by a percentage. 3M is a lot like PG and JNJ in that you will see their products everywhere. Combine that with the diversification of products and I see them being able to withstand almost any market panic.
Wal-Mart is currently in my portfolio, but I purchased them when the price was materially lower. WMT is another company I’d gladly see have a larger allocation. I also can stand behind T and VZ being in this portfolio. I don’t believe either is going to see significant growth, but they both bring a great dividend yield.
Target (TGT) belongs in this portfolio. I have a buy rating on Target. They have an exceptionally high dividend yield and excellent coverage ratio. Analysts and investors have soured on the company for a number of reasons. Most of those reasons are poor. Analysts are projecting weaker earnings for the company, but in the first quarter the company decimated forecasts. Several retail investors still despise the company for their bathroom policy. I believe retail investors are driving the current valuations across the market with enormous buying activity in large capitalization tech companies. Such as Apple (AAPL), Google (GOOG) (GOOGL), and Amazon (AMZN). Some investors may argue that Amazon is not a tech company. However, their success with streaming content to prime members and hosting data in the cloud makes it a material exposure for them.
Conclusion
The high dividend yield on this ETF makes it a suitable investment for investors seeking income. VYM has correlated with the S&P 500 on returns since inception, but has done it carrying a high dividend yield.
Vanguard funds usually have a low expense ratio and VYM is no exception. The low expense ratio is great for investors looking to get market exposure and not having to pay absurd expenses. VYM is a fund I’d be interested in having as part of my portfolio in the event of a market panic. While I do believe this fund has a good strategy and a great way to supplement income in a portfolio, the valuation of the entire market is too high for my liking right now.
I think VYM would be substantially more attractive in the $69-$72 range.
If you want to know more about finding the best opportunities in preferred shares, consider joining my service for the best research on preferred shares. In addition to constantly updating models with clear buy and sell target prices, I also offer free text message and e-mail alerts when I find a great deal. Anyone who signs up before August 1st, 2017 will be able to lock in annual rates at only $340 per year.
This article was written by
You’ll find several reports on The REIT Forum that don’t get posted to the public side of Seeking Alpha. Many of our public reports are dramatically reduced versions of subscriber articles. If you enjoy our public articles, you’ll love the content we keep for subscribers.
Analyst’s Disclosure: I am/we are long MO, WMT, TGT, PM, FSIVX, FSITX, BMNM, WPG, GPMT, SFM. 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.
No financial advice. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints. CWMF actively trades in preferred shares and may buy or sell anything in the sector without prior notice. Tipranks: Buy Target. I am also long DX-A, CBL-D, and GBLIL.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.