How To Build a Vanguard Three Fund Portfolio Paying Dividends

Here is my best Vanguard three-fund portfolio!

Not long ago, I wrote an article reviewing the Vanguard High Dividend Yield ETF (VYM).  And subsequently, one of my readers posed an interesting question to me on Twitter.

He asked:

“How about building a dividend-paying ETF portfolio?”  And I responded, “It certainly can be done.  You could use VYM and its international counterpart, just to keep it simple”.

After pondering the reader’s question…

I thought it was an excellent investment topic to cover. To add to the Dividends Diversify investment library.

Certainly, it deserved more attention than just a spur-of-the-moment Twitter tweet on my part. So, let’s dive in…

Do it yourself investing in three ETFs that pay dividends

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

Dividend Stocks versus Dividend ETF’s

After all, individual dividend stock selection is not for everyone.  To do it right, it takes clearly defined investment objectives, time and research.

If you like those types of activities like me, that’s great.  Then you should check out my model portfolio full of individual dividend stocks.  Each stock in the model portfolio is linked to its most recent dividend stock analysis here at Dividends Diversify.

But since not everyone is like me (thank goodness), let’s dig into how to build a Vanguard three fund portfolio paying dividends.

And the great thing is, you can get started without a lot of money.

Related: Webull stock trading app review – buy & sell stocks for free

What Is The Vanguard Three-fund portfolio?

Bogleheads popularized the Vanguard three-fund portfolio. That’s an interesting investment term. So, let’s discuss it.

What Are Bogleheads?

Bogleheads are devoted followers of John Bogle, the late founder of Vanguard.  They believe in investing at a young age, living below one’s means, regular saving, broad investment diversification, and sticking to one’s investment plan.

Source:  Bogleheads.org

What Three Vanguard Funds?

Then What Three Funds Go Into The Portfolio?  For Bogleheads, the answer to the question “what mutual funds should be used in a three-fund portfolio,” is “low-cost funds that represent entire markets.”

If you ask different people to choose funds for a three-fund portfolio, you will get different fund choices.  But they should have these main characteristics:

  • Low cost
  • Representation of entire markets

From Vanguard’s core funds, Bogleheads believe the best funds for a three-fund portfolio are:

  • Vanguard Total Stock Market Index Fund (VTSAX)
  • Vanguard Total International Stock Index Fund (VTIAX)
  • Vanguard Total Bond Market Fund (VBTLX)

Source:  Bogleheads.org – Three Fund Portfolio

Vanguard Three Fund Portfolio Paying Dividends

To build a three fund ETF portfolio paying dividends, we will have to deviate slightly from the Bogleheads classic definition of a three fund portfolio.

Not All Stocks Pay Dividends

Why?  Because we are limiting our stock selection to only those companies that pay dividends for the portfolio income they provide.   So by definition, the funds I will choose will not represent entire markets.

Many stocks in the stock market do not pay dividends.  For example, a well-known company like Amazon comes to my mind immediately.

Exchange Traded Funds (ETFs)

Furthermore, we will build our portfolio with super low-cost ETFs per my reader’s suggestion.  Rather than traditional open-end mutual funds.  The differences between the two are not significant for our purposes.  And I will leave these differences for a story on another day.

Related: 60+ investment assets that appreciate in value 

So we will bend the rules just a little to build our Vanguard three fund portfolio paying dividends. I hope the Bogleheads will understand.

Let’s get started by identifying the funds.  All information for the funds is sourced from Vanguard’s website.

First Fund – US Stocks (VYM)

The first fund selection should come as no surprise.  It is the Vanguard High Dividend Yield ETF (VYM).

VYM tracks the FTSE high dividend yield index.  The index is comprised primarily of US-based stocks that are characterized by higher than average dividend yields.

Trailing dividend yield – 3.0%

Expense ratio – .06%

Related:  Vanguard High Dividend Yield ETF review.

Second Fund – International Stocks (VYMI)

For our second fund, we will go with VYM’s “close cousin”.  It is the Vanguard International High Dividend Yield ETF (VYMI).

VYMI seeks to track the performance of the FTSE All-World (excluding the US) High Dividend Yield Index.

The fund provides a convenient way to get exposure to international stocks that are forecasted to have above average dividend yields.

Trailing dividend yield – 4.2%

Expense ratio – .32%

As is typical with many international stocks versus US stocks, the dividend yield of VYMI is higher than VYM’s.  But the fund also carries a slightly higher expense ratio.

Related: Vanguard International High Dividend ETF review

Third Fund – US Bonds (BND)

For our third fund, we will stay close to the standard Boglehead fund recommendation.  That is the Vanguard Total Bond Market ETF (BND).  According to Vanguard, the fund:

  • Provides broad exposure to US investment grade bonds
  • Offers relatively high potential for investment income
  • Tends to rise and fall modestly in value
  • Is appropriate for a reliable income stream
  • And is appropriate for diversifying the risks of an all-stock portfolio

Trailing income yield – 2.7%

Expense ratio – .035%

This is not a dividend stock fund.  Bonds and loans pay interest, not dividends.  If you want a pure dividend stock ETF portfolio, drop this one and invest only in the first two.  But for today’s purposes, we will stick with the Vanguard three fund portfolio concept.

Related: Vanguard Total Bond Market Index Fund ETF review

Three Fund Portfolio Asset Allocation

Now that we have our funds selected we need to decide how much money to put in each one.  One investment strategy says choose your allocation of money to the three funds is by age.

The rule of thumb is to take your age and invest that percentage in bonds.  Then take the rest and invest it in stocks.  Split the stock percentage by 75% US and 25% International.  This is a target asset allocation for example purposes.  Yours may be different.

For example, if you are 40 years old, allocate the amount of money you have to invest between the Vanguard three fund portfolio like this:

Target asset allocation for Vanguard three fund portfolio

Related:  Income Producing Assets For Passive Income

Rebalancing Your Three Fund Portfolio

Rebalancing is the act of bringing your investments back to the target asset allocation.  Looking at your three fund portfolio annually and doing this should be sufficient.

Let’s say that at the end of the first year, the stock market did really well and the percentage of your holdings in each Vanguard fund looks like this:

Asset allocation prior to rebalancing the portfolio

Rebalancing says you should sell off a portion of VYM and VYMI and reinvest the proceeds into BND to get back to your target asset allocation.  This forces the investor to sell higher-performing investment assets and buy lower-performing ones.

Buying low and selling high is usually a solid investing strategy!

Vanguard Three Fund Portfolio Performance

Now you might ask what kind of investment returns can be expected from this Vanguard three-fund portfolio.  Let’s look at the performance of these three funds since their date of inception.  Of course, past performance is never a guarantee of future results.

The table below presents the average annual fund return since inception. And the current trailing dividend yield.

FundFund Inception || Annual Return || Dividend Yield
VYM11/20067.3%3.0%
VYMI2/20168.8%4.2%
BND4/20074.1%2.7%
WeightedAverage6.2%3.1%
Returns & yields as of the date of publication

It is interesting to note that a large portion of the annual return will come in the form of dividends and interest payments.  You can instruct your broker to reinvest these automatically.  Or let the cash build up and use it to rebalance your portfolio at the end of each year.

Advantages of A Vanguard Three Fund Portfolio Paying Dividends

Investment returns:  Research indicates dividend-paying stocks outperform the broader stock market.

Simplicity:  There are just 3 investments to manage.  Set it up and forget it except once a year when it is time to rebalance.

Defensive: By increasing the bond allocation. These 3 funds can make for a defensive investment portfolio. That will hold up well during difficult economic times.

Costs:  Vanguard ETFs have some of the lowest expense ratios available.  Buy them in a Vanguard brokerage account and make your trades for free. You can also invest in stocks and ETFs for free through M1 Finance.

Little money is needed: You can get started with just a few dollars and add more money over time as you get it.

Save time:  You should be able to set up and manage this portfolio in an hour or two per year.

Diversification:  Get hundreds of stocks and bonds from as many different companies.

Vanguard Three Fund Portfolio Summary

As I said in the beginning, there is more than one way to invest for portfolio income and get paid dividends.  And I’m sure the Bogleheads would agree.

It doesn’t have to be expensive or time-consuming. Set up and invest for free through your M1 Finance account. You can do it with a Vanguard three fund portfolio by:

  1. Selecting your three funds
  2. Choosing your asset allocation
  3. Making your investment
  4. Rebalancing on an annual basis

This is a passive investment approach to do it yourself dividend and income investing. The method has a number of advantages for the investor:

  • Solid investment returns
  • Simplicity
  • Low costs
  • Time savings
  • Diversification

Related Articles About Investing In Vanguard & Other Assets

How To Build A Portfolio of Blue Chip Stocks Paying Dividends

Calculate if you can live off your dividends

Fast dividend growth from the VIG ETF

The best investment portfolio for a 25-year-old

The best investing tips to maximize your money

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

Of all of the Vanguard funds listed in this article, I currently own only VYM.

12 thoughts on “How To Build a Vanguard Three Fund Portfolio Paying Dividends”

  1. There is also VIG and VIGI. The typical 3-fund portfolio I would build is with VOO, VXUS and BND. Some people tend to add BNDX as well. Also, the dividend ETFs do not have exposure to REITs. So, adding in a small % of VNQ will help diversify and boost the dividends.

    I own VIG, VYM, VOO and BND.

  2. I used a mix of about 6 Vanguard ETFs from 2011 – 2016, international, domestic, bonds, equities, and REIT. It did really well. I’ll likely build a new mix soon and will consider these ETFs. Thanks!

    • Hi Matt, A good mix of Vanguard funds is a great investing strategy. Glad yours has done well for you. Tom

  3. I like the 3-fund idea Tom. It’s simple. Right now, the only fund I have in my Roth IRA is the total stock market index fund from Vanguard. I’ve been meaning to diversify, and will eventually add more to the mix. Thanks for the suggestion, and Happy 4th!

    • Hey DP. Happy 4th to you too. You can’t go wrong with the total US stock market ETF. Maybe add a non-US ETF when you get a chance to do so. Tom

  4. Hi Tom,

    Great portfolio. Something I’ve never been certain of is whether the dividends from the US fund will be taxed at the qualified dividend rate of 15% and the international ones at higher rates.

    Also, I agree with you on using M1. They’re my main broker and really make it easy!

    Cheers,
    Miguel

    • Hi Miguel, I find that most international dividends are taxed at the qualified rate. Not quite 100%, but a high percentage. Tom

  5. This is similar to the ‘couch potato portfolio’ (not sure if they call it that in the US), but it’s a great way to start off a clean portfolio covering a lot of the market. If I were to turn back time I would definitely have my ETFs mmuch more streamlined.

    • Hi GYM. Agree on turning back the clock. I would do the same and keep it super simple in my younger days too. No regrets though. Tom

  6. A simple and effective approach to hands-off investing indeed! Apart from VYM, I also own some VNQ for real-estate exposure.

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