Seeking Alpha

The Vanguard High Dividend Yield ETF: A Well-Managed Dividend Play

About: Vanguard High Dividend Yield ETF (VYM), Includes: CVX, DGRO, DVY, HDV, INTC, JNJ, JPM, JPM.PC, JPM.PF, MRK, PFE, PG, SCHD, T, TBB, TBC, VIG, VZ, XOM
by: Michael A. Gayed, CFA

Vanguard High Dividend Yield ETF invests in quality large caps with above-average dividend yields. It regularly rebalances its portfolio to manage risk.

For the 12 months ended 31 Oct. 2019, it returned 11.31% for ETF Shares, performing in line with its benchmark, the FTSE High Dividend Yield Index.

Though this hugely popular ETF faces three potential black swans, it still seems like a robust long-term investment.

The ETF industry has become like a supermarket. You can't go in and not know what you want - you'll end up buying all these things that you won't ever eat. - Matthew Reiner (runs all-ETF portfolios for Atlanta-based Wela Strategies)

The Vanguard High Dividend Yield ETF (NYSEARCA:VYM) is an attractive ETF to own for investors who invest in large caps for dividend. Owning VYM helps dividend investors diversify their portfolio and avoid overexposure to a single sector. Regular rebalancing, a low expense ratio of 0.06%, a better performance than its peers, and a NAV that's jumped up rather quickly are reasons why an investment in this ETF makes sense.


Image Source: The Vanguard Site

That said, VYM is a buy for the long term either on a correction or in a SIP (Systematic Investment Plan). Here are the reasons why.

VYM Internals

As on Dec 31 2019, VYM has managed to generate a return of 15.6% on equity, an admirable number. To minimize risks and maximize returns, the fund's management team rebalances its portfolio regularly. Rebalancing and diversifying its portfolio efficiently are the reasons why VYM has delivered solid returns year after year.


Image Source: The Vanguard Site

Approximately 65% of its portfolio is invested in the financials, consumer goods, healthcare, technology, and consumer services sectors. Ten of their largest holdings account for 26.60% of the total net assets.


Image Source: The Vanguard Site

Of VYM's top ten holdings, JPMorgan Chase (JPM), Johnson & Johnson (JNJ), Procter & Gamble (PG), AT&T (T), Intel (INTC), Verizon (VZ) and Merck (MRK) delivered big gains in 2019. Though Exxon Mobil (XOM) and Pfizer (PFE) underperformed, and Chevron (CVX) sulked in 2019, the NAV continued its upward march.


Image Source: Seeking Alpha

The Fed rate cuts and low unemployment numbers enthused investment in these sectors and the consequent rapid price appreciation in the ETF's holdings pushed up its NAV.

Risk Profile

VYM's risk profile is rated 4 out of 5. It's a moderate-to-aggressive ETF with a diverse portfolio that is subject to wide fluctuations. Investing in such an ETF pays off only when it is for the long term. Holding VYM for a longer term (8 years and above) will help investors easily ride through the downturns. The other option is to invest in it through a SIP because that takes away the emotions involved in investing/trading and dramatically reduces the risk.

A Comparison of VYM's Fundamentals with its Peers

VYM's ETF peers are iShares Core High Dividend (HDV), Vanguard Dividend Appreciation (VIG), Schwab U.S. Dividend Equity (SCHD), iShares Select Dividend (DVY) and iShares Core Dividend Growth ETF (DGRO).


Image Source: Seeking Alpha

VYM has delivered 39.19% in price performance over a period of 5 years, which is below VIG's 62.94%, SCHD's 50.06%, and DGRO's 65.48%. However, VYM's risk is more spread out as its portfolio holds 403 stocks while the others, except DGRO, hold between 78 and 186 stocks.

VYM's risk concentration is at par with DGRO's (481 stocks). However, DGRO pays a much lower dividend of $0.93 but has returned more in price over a period of 1 year. In terms of AUM, VYM manages $29.01B compared to DGRO's $10.17B. Generally, a higher AUM implies a higher quality of management. In this shootout, it does seem that VYM stands out, mainly because its risks are well spread out and its assets under management are high.


Image Source: Seeking Alpha

Summing Up

As of Feb 2, 2019, VYM with its holding of 399 stocks and 2 treasury bills remains well-diversified. However, the markets are going through a very volatile phase which can take a toll on NAVs.

Therefore, it makes sense to see how VYM's top five sector holdings are performing (as of 2 Feb 2020, the date of writing this post). I've compared the prices of 5 SPDR ETFs: XLF (Financials), XLP (Consumer Staples), XLV (Healthcare), XNTK (Technology) and XLY (Consumer Discretionary).


Image Source: Seeking Alpha

Though I am bullish on the ETF, I also am staring at a very volatile market wherein prices are rapidly dropping. It is uncertain when the trend will change, but investing in VYM makes sense for dividend investors who want to hold on to well-managed large capitalized companies for the long term (more than 8 years). Playing for NAV bump-ups or dividends in the short or medium term may not work.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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