The US stock market hit new high after new high in 2017. I have no idea where the market will go from here, but I have to admit I get nervous from time to time. As the old saying goes “bull markets climb a wall of worry”. And, I am not immune to that worry.
WHAT WORRY DID TO ME
As a dividend growth stock investor at heart, I normally put most of my new capital to work in individual dividend paying companies. Especially those companies that grow their dividend on an annual basis. You can see a representative list of some of the stocks I own in the Dividends Deluxe model portfolio. However, as the market continued to climb in 2017, I found my desire to add to individual dividend stocks decline.
THE ACTION I TOOK AND WHY
I like to add to my equity holdings over time using a dollar cost averaging strategy, so rather than stop investing I added to my position each month in the Vanguard High Dividend Yield ETF (VYM). Here’s why:
- Immediate diversification among many stocks
- Removed the stress of picking individual stocks while markets made new highs
- Fits with my overall dividend growth stock investment strategy
- Had available cash to invest in our IRA accounts (I value ETF diversification even more in our IRAs due to the limited availability of new funds in these accounts)
- No transaction fees and a very low expense ratio of .08%
Here are a few facts about VYM.
DIVIDEND YIELD
At the recent price of $88 per share, VYM had a trailing 12 month dividend yield of 2.73%
COMPOUND ANNUAL DIVIDEND GROWTH RATE (CAGR)
As evidenced by the CAGR, the dividend has grown nicely over the past several years. I think a 6% to 8% dividend growth rate going forward is a realistic expectation. That growth may be supported by the corporate tax rate reduction starting in 2018. I hope that in future years, the tax cut trickles through as higher dividend payments for us dividend stock investors.
| 1 Year | 3 Years | 5 Years | 7 Years |
| 8.84% | 7.96% | 8.55% | 11.93% |
TOP 10 HOLDINGS
A core investing principle is diversification. VYM holds about 400 stocks. That is many more than I could ever research, buy, own and manage individually. However, I do own 9 of the 10 top holdings in VYM. The funds top 10 holdings represent about 31% of assets. The companies include:
- Microsoft Corp.
- Johnson & Johnson
- JPMorgan Chase & Co.
- Exxon Mobil Corp.
- Wells Fargo & Co.
- Procter & Gamble Co.
- Chevron Corp.
- AT&T Inc.
- Pfizer Inc.
- Intel Corp.
WRAPPING IT UP
I’ve found through the many comments left by readers here at Dividends Diversify that not everyone cares to buy and maintain a portfolio of individual stocks. VYM is an option to consider. The fund is also a great option for others wanting to get started in dividend growth investing, but do not have the funds yet to build a diversified portfolio of individual stocks.
As always, you should do your own research and make sure VYM is right for your individual circumstances. But, even for a dividend growth stock picker like me, VYM has found a home serving a good purpose in our IRA accounts.
Of course, when the US stock market goes into a correction or bear market, VYM won’t be immune to the decline. Hopefully, it will just represent a good opportunity to buy some quality dividend paying companies at lower prices and higher dividend yields! Maybe by then I will be back adding to my individual stock holdings on a more regular basis.
You can learn a lot more about VYM over at Vanguard’s website.
Okay, for full disclosure, in early January I did add to my position in Dominion Energy. By following the link, you can see my dividend deep dive analysis for Dominion. The company’s stock has been under pressure lately due to the announced acquisition of SCANA as well as the threat from higher interest rates. This was the first individual stock purchase I have made since the third quarter of 2017.
Do you own VYM? Or perhaps another fund? Or are you a hard core individual stock investor? Leave a comment, join the conversation and let us all know.
Disclosure & Disclaimer
I am long VYM and D. Always remember that the information on this site is for educational and entertainment purposes only. The information is not to be used as investment advice specific to your circumstances. Consult your personal investment and/or tax advisers prior to investing money. Please realize you are solely responsible for any investment gains or losses as a result of the investments you enter into. You can find additional information under this site’s disclaimer tab: Disclaimer & Privacy Policy.
Good stuff as usual Tom. I’ve been kind of kicking the tires on some funds lately. You present a nice option with VYM. I’m more of an individual stock guy (outside of 401K). This market though man is sure wild right now. The value plays are getting to be few and far between!
Hi Mr. DS,
Agree on the market. Good luck with your fund research and investments whatever direction you take. Tom
Hola Tom. I am starting to think you are a boglehead too. I love VYM for it’s cost and yield. Nice article.
Agree Mr. Geek. I have a little boglehead in me. Tom
Hi Tom,
VYM is one of my favorite etfs; however l still like investing in individual stocks better. Even though l invest for cash flow, watching individual stock prices going up and down is a great entertainment for me. It doesn’t stress me at all as the price doesn’t fluctuate my cash flow (dividends).
Nice post as usual.
Thanks Mr. ATM. Having more money in individual dividend stocks than funds, I have to agree with your preference. However, VYM still serves a purpose for me. Tom
Good stuff, Tom. The more I think about it, the more I am drawn to the idea of moving to passive investing and focusing on other things in life instead. While picking stocks is a lot of fun, its not worth the effort and still lag the market year after year. Its been one of my goals for 2018 — move more funds towards passive investing
Best
R2R
Hi R2R,
Thanks for stopping by. I think a lot of folks share your view. I still like to hold individual stocks too, but VYM also serves a purpose for me. Tom
I am starting to like ETFs a lot more because there is no transaction fee involved. If you want to invest on a regular basis to maximize DCA, individual stocks can get expensive.
Great post Tom.
Thanks Caroline, Agree. Generally no transaction fees if you buy your brokers ETF’s and regardless, rock bottom expense ratios. Keeping investment costs low is so very important. Tom
Hi Tom,
I have been mainly in ETFs for a few years now, although I still like and have a few dividend stocks in my fun money account. I have the same nervous feelings as you watching the market hit all time highs. In 2018 I am going to start having a larger cash position. Great post!
Thanks Steve, I’m already sitting on a pretty good cash stake because of the rising market. I am, however, starting to see some better values within a couple sectors that have not participated as much. Namely, utilities and REITs. But, as you well know, they will tumble too when the market goes down again. Tom
HI Tom. Thanks for another great post. My mutual fund portfolio (4 passive index funds) sort of serves the same function in my portfolio. The yield is nowhere near VYM (last year it was about 2.2 percent). But those funds represent my largest investment and I DCA into those funds every month. I like the idea of spreading the risk around and earning market returns. I think VYM accomplishes the same goal in a dividend portfolio – solid yield with greatly reduced risk.
Thanks for your thoughts FIREman. It sounds like you have a well thought out approach to the utilization of funds in your portfolio. Tom
“Bull markets climb a wall of worry” I love that and have never heard it. Love me some VYM! I am a closet Fama-French guy that enjoys having some tilt towards large and small cap value.
Hey DM, Being a university teacher, I love it when someone pulls out a classic academic model/theory. Very impressive. Tom
Hey Tom,
Sounds like a good choice. I still have to educate myself on how to choose a good dividend ETF. For example, choosing VIG vs VYM vs SCHD vs DGRO. One never stops learning!
Cheers,
Miguel
Hi Miguel, Being a Vanguard supporter, I would lean toward VYM or VIG. Other than that decide what your objectives are and choose. I don’t know SCHD or DGRO, but I’m guessing the four you list are fairly similar. Tom
Thanks for sharing, Tom.
As you know, I’m slowly tipping toward additional individual names vs. funds/ETFs, but some of the reasons you highlighted here do reinforce my current allocation into the latter group. But don’t worry – this won’t stop me from continuing to consider additional individual names 🙂 .
On your questions, we have considered VYM. But we’re currently heavily invested in VEIRX. The majority of our net worth is currently in this specific fund. Similar to VYM’s holdings, a lot of the names held in the fund are the same as the ETF (of course, there are differences – mainly the number of securities, etc.). We’ve been a fan of VEIRX as its met our respective investment objectives thus far. Overall, Vanguard, in particular, and a number of other ETF and fund families have a lot of similar options, so it’s best to shop around and research as needed.
Thanks for the post. – Mike
Hi Mike, Hard to go wrong with VEIRX. I don’t know its history but I’m sure it has done well for you. I think both funds and individual names can have a place in one’s portfolio. To steal your phrase, it’s all about finding the right balance! Tom
“…and it’s never ending.”
That’s for sure Mike. Just when I think I have found balance, it slips away again. Tom
Hey Tom,
Before I got started, I initially struggled with the decision as to whether I wanted to invest in index funds or individual stocks. Although I ultimately chose to focus on individual stocks, I think index funds are a great way to go and VYM is definitely a solid option. In my Roth IRA, I’m exploring the possibility of adding VYM and VIG but haven’t made that decision yet. Thanks for laying out your thought process on VYM.
Hi DP, I think both stocks and funds can have a place in one’s portfolio. Sounds like your thinking is similar to mine relating to your IRA. I considered both VYM and VIG and went with VYM because of its higher yield. The dividend may not grow as fast as VIG, but it still has a solid growth rate and I preferred the dividend income up front with the higher yield. Thanks for the comment. Tom
The first posts on my blog (in dutch) are about my doubts wether to start with etfs or individual stocks. For me personally, I wanted to control (as much as possible) in which companies I invest. So although I agree with the simplicity and peace of mind which goes with etfs it is not for me.
My diversification is boasted in cash, additional mortgage payments and some speculation with crypto’s.
Hey there Mr. Robot. Sounds like you gave it some good thought which is key. I am not able to read Dutch so I will have to take your word for it. I admire everyone who is bi-lingual. It was always a goal of mine when I was younger to learn another language. It is one goal, however, that I have never pursued. Maybe some day. Tom
Here in The Netherlands you of course get Dutch but also English in primary school.when you go to secondary we additionally get German and French. Later on you get to choose whether you keep German en French or drop them. English is mandatory though and with good reason.
I would not recommend Dutch as your second language, it’s one of the more difficult languages to learn or so I have read. 🙂
Thanks for the insight Mr. Robot. Your language skills are very impressive. If I ever do study another language, I was thinking Spanish for no particular reason. Tom
I haven’t heard of VYM, there are so many ETFs out there, different flavours for everyone.
I like ETF investing and do a DCA approach too on a monthly basis. I also add a bit of dividends in addition to that, and this approach has worked well for me.
We’ll see what happens when the crash comes! In the meantime we will all keep trodding along.
Hi GYM. Hopefully by saying the word crash we won’t get one. Kind of a backward jinx. I think ETF’s and individual stocks both can have a place in one’s portfolio. So I use the same approach as you and it has worked fine for me as well. I will trod along with you. Tom
I used to own VYM about a year or so ago and decided to sell some of my stocks last year to pay off my house since I thought my monthly liabilities will down greatly with no rent/no installment etc.
Regardless, I agree VYM is a very good performance ETF, I also like VIG, VHT, VGT VCR, XLP, PRGTX, PRNHX and some more. I am long on a few of these funds but particularly on VYM anymore but I surely like idea of buying into VYM,
Good Luck.
TDK
Thanks TDK. Appreciate your thoughts. Tom
Sounds like a sensible strategy Tom, especially if there’s no specific stocks that appeal at the moment. I’m a big fan of index funds, and also love the strong dividend paying stocks, but am absolutely a hard-core value investor at heart!
Hello again Frankie. There has been a bit of a sector rotation out of dividend paying/interest rate sensitive stocks this January here in the US markets. Until this month I had not bought any individual names since last Sept. 2017. I did add to Dominion Energy (D) and Realty Income (O) this month because of the pull back in the stock prices. We shall see how it goes, I’m a big fan of dividend payers like you. I wish I could get some franking credits on my US shares. 🙂 Tom
I have some VYM as well! Warren Buffett is a big fan of Vanguard index funds as well. I read an article recently that he wants most of his wealth after he passes away to be invested with Vanguard because of the low-cost especially. it gives more comfort that we are with a solid company that provides great products at a low cost.
Couldn’t agree more with you or Warren, SMM. Thanks for stopping by and commenting. Tom
There really isn’t a best way to go about investing. Mutual funds vs individual stocks both work well. Especially with diversification being key, mutual funds are a good way to go. That is why I do a mix of both. In my tax advantage accounts I have funds but my taxable account holds my individual stocks. Just need to find whatever works for you and continue the strategy.
Hi Daze, I think we see it the same. I do a mix a both too. Tom
Hi Tom!
Thanks for the recommendation. I was just googling this etf for some more info. Will likely look into it more this week. The mer is definitely low at 0.08%!! Let’s see where the markets are heading… I’m not immune to this worry lol. I need to focus on paying down some of my mortgage now. Canada just recently hiked rates again… 😩😩😩
Hi Ms. Panda, Good luck with your ETF research and the debt pay down. I’m pretty debt averse, so paying it down is always a good idea to me before investing in stocks. But as you mention, do your own research and make the best decision for your situation. Tom
Hi Tom, enjoyed the article. However, I’m curious: If the concern is about the market being at all highs, wouldn’t it make more sense to focus on individual value names that are good value, as opposed to a broad ETF that likely is not (since many of its top holdings look to be overvalued)?
Hi SD, Understand your point and it is valid. During that time, however, I was having a hard time finding good value so I decided to mitigate that risk with diversification. Tom