1 of Several Vanguard Dividend ETFs To Consider
I rarely write about mutual funds and ETFs like VYM. That is because I spend most of my time analyzing and investing in individual dividend growth stocks.
Today, I’m going to make an exception. And discuss one of my favorite investments.
This investment option is one of the best exchange-traded funds with high dividends. It is an excellent choice for beginners or experienced investors alike.
It is the Vanguard High Dividend Yield ETF. This ETF trades on the New York Stock Exchange (NYSE) under the stock ticker symbol VYM (NYSEARCA: VYM).
If you are not interested in picking individual dividend stocks, VYM is an excellent alternative.
Disclosure: This post contains referral links.
Definition Of An ETF
Let’s start with the basics. I will summarize the definition of an ETF from Investopedia…
An exchange-traded fund (ETF) is a collection of securities—such as stocks—that tracks an underlying index.
An ETF is called an exchange-traded fund since it is traded on an exchange just like an individual stock. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market.
You need a brokerage account to purchase shares in an ETF. The online platform, Webull, is an excellent option. They offer free shares of stock when you sign up. It’s like free money.
Open-end mutual funds are similar to ETFs. They are also a collection of securities. However, they trade only once per day after the markets close.
ETF Further Explained
By making one small investment in your brokerage account, you get immediate ownership of many dividend stocks rather than just one.
So VYM provides instant diversification. That is 1 of the advantages of investing in Vanguard ETFs. It is also 1 of the major differences between buying a single stock versus an ETF, like VYM.
Now that we know what an ETF is, let’s do our investment research. And dig into our VYM ETF review.
VYM Tracks An Index
As our ETF definition mentions, ETFs track an underlying index. VYM tracks the FTSE high dividend yield index.
Tracking an index is a passive form of investing.
The FTSE index is comprised primarily of US-based stocks that are characterized by higher than average dividend yields.
VYM ETF Overview
I think our definition and explanations indicate what we are getting into. But let’s head over to Vanguard and see what they say about their own ETF.
Vanguard states that VYM:
- Seeks to track the performance of the FTSE High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
- Provides a convenient way to track the performance of stocks that are forecasted to have above-average dividend yields.
VYM stock holdings include over 400 individual dividend stocks. That’s right; you get over 400 dividend stocks with one single purchase.
The 10 largest holdings comprise about 25% of the fund. So, by looking at the top 10, we can get a pretty good feel for VYM on an overall basis.
However, I will expand the VYM ETF holdings analysis to include the top 20 stocks. They comprise nearly 42% of the fund.
Looking at this number of VYM holdings will give us a very good understanding of the fund. It’s also a good way to identify ideas for a dividend stock portfolio. That is if you want to pick and invest in individual stocks.
Here they are from the VYM holding list. For the dividend stocks I cover here at Dividends Diversify, I have linked to my most recent stock analysis for the company.
Table 1: VYM Top Holdings
|Rank||Dividend Stock||% of Fund|
|1||Johnson & Johnson||3.9%|
|2||Procter & Gamble Co.||3.2|
|3||J.P. Morgan Chase &Co.||3.0|
|4||Verizon Communications Inc.||2.4|
|7||Merck & Co. Inc.||2.1|
|9||Cisco Systems Inc.||2.0|
|10||Comcast Corp. Class A||2.0|
|11||Bank of America Corp.||2.0|
|15||Exxon Mobile Corp.||1.8|
|20||NextEra Energy Inc.||1.4|
It is nice to see one of my favorite utility stocks, NextEra, make the top 20.
Out of curiosity, I scanned through all of the VYM holdings. Why?
To see if this Vanguard ETF contained any other dividend stocks that I review on a regular basis. I came across a few and listed them here for your reference.
|Philip Morris (PMI)|
|International Business Machines Corp. (IBM)|
|United Parcel Service (UPS)|
|Target Corp. (TGT)|
|Duke Energy Corp. (DUK)|
While looking through all of VYM’s holdings, I noticed something else. What is that?
Well, there are plenty of Dividend Kings represented in this high dividend yield stock portfolio. Dividend Kings are those rare and special companies that have increased their dividends for at least 50 years in a row.
All The Facts About VYM Dividends
Dividends are very important to me. So, next up, let’s cover all the facts and figures about VYM’s dividends.
VYM Dividend Payout
Over the past year, the VYM dividend payout was $2.96 per share.
VYM Dividend Yield
At the recent VYM stock price, the annualized dividend payout translates to a 3.6% VYM dividend yield.
Some investors might argue that VYM does not pay high dividends as the fund’s name implies. And I agree. 3.6% is a moderate dividend yield, in my opinion.
I’m not sure there is an exact definition of high dividend yield. Anything over 5% is a high dividend yield to me.
I prefer dividend yields in the 3-5% range. So, the VYM dividend fits right in my preferred “sweet spot”.
When Does VYM Pay Dividends?
VYM does not make monthly dividend payments. It pays dividends on a quarterly basis, or 4 times per year. The dividends are paid in the last week of these months: March, June, September, and December.
As an investor in the Vanguard High Dividend Yield ETF, you must complete your purchase by the ex-dividend date to receive the next dividend. VYM’s ex-dividend date falls 3 business days prior to the dividend payment date.
The ex-dividend date and VYM dividend payment date is slightly different each quarter. So, it’s best to check Vanguard’s website to get the exact date for each dividend.
Also note, each quarterly VYM ETF dividend payout is a different amount. The payout depends on which companies in the fund are paying their dividends, and when.
Do you need the same cash payout each quarter? Or, do you need to receive dividend payments every month?
If yes, please note, that VYM by itself does not provide the same cash payment each quarter. Nor does VYM pay monthly dividends.
These can be important considerations for those who use dividends for living expenses. But, don’t be discouraged. There are easy ways to generate monthly dividend income.
Next, we will look at the VYM dividend history. Using the annual dividend payments since the ETFs inception for our review.
VYM Dividend History
The dividend history should provide some insight into the consistency of dividend cash flow from all of the VYM stock holdings.
The Vanguard High Dividend Yield ETF began operations in November 2006. So, we will start our historical VYM dividend history review in 2007. The fund’s first full year of operation.
Table 2: VYM Dividend Payout Per Year
|Year||Dividends Per Share|
I think it is interesting that the dividend payment decreased in both 2009 and again in 2010. This was due to the financial crisis, global recession, and bear market in stocks those situations created.
During that time, many companies were forced to reduce their dividends to conserve cash. As a result, the VYM dividend payments went down.
I suspect we will see a pause in dividend growth during the second half of 2020 and 2021. This will be a result of the most recent recession.
VYM Dividend Growth Rate
Now let’s take the annual VYM dividend payout and see what the dividend growth rate looks like.
With a moderate dividend yield, I certainly want to see some solid dividend growth. Why? Because dividend yields and dividend growth normally have an inverse relationship.
Table 3: Compound Annual VYM Dividend Growth Rate
|# Years||VYM Dividend Growth|
VYM’s dividend growth rate reflects so many things that have happened during recent history. And the impact history has had on the fund’s holdings, all of which are stocks that pay dividends.
We have the bust years represented from the 2007-2009 bear market factored into the 11-year growth rate of 6.4%.
And by looking at a 3-year growth of nearly 9% we can see a lot.
It reflects a booming economy. And rising corporate profits that were partly fueled by the corporate tax cuts enacted in 2018. Also, employment and consumer spending reaching record levels.
For my planning purpose, I’m going to assume VYM dividend growth will be in the 6% range for future years. Some years will be better, some years will be worse.
Overall, VYM’s dividend yield of 3.6% and projected dividend growth of 6% is a nice combination.
VYM Performance: Total Return
As I have mentioned, VYM started operating in November of 2006. According to Vanguard, its ETF has returned on average 6.8% per year since its inception.
November 2006 was near a stock market peak. And, less than a year later, one of the worst bear markets in stocks began.
Taking into account that the Vanguard High Yield Dividend ETF started near the peak of the market and right before a bear market tells us something.
And what is that? No matter when you invest in stocks or ETFs for dividends, invest for the long term, stay diversified and your results will likely be okay.
VYM Expense Ratio
Here is an area where ETFs in general and Vanguard specifically shine. That is the area of low costs as represented by the VYM expense ratio.
How is that? Well, VYM’s expense ratio is a super small .06%.
In other words, if you have a balance of $1,000 in VYM for the year, Vanguard will charge you only 60 cents.
If you buy VYM through a Vanguard brokerage account, the commission on the trade is free. On the other hand, if your brokerage account is with another firm, their standard ETF trading commissions will apply.
So if you are interested in VYM, the cheapest way may be to buy it through your existing Vanguard account. Or open a new Vanguard account prior to purchasing.
On the other hand, many brokerage firms have now implemented free stock trading. I use Webull to trade stocks for free.
And for a limited time, Webull is offering free stock when you sign up and fund your account.
Valuation: Is VYM A Good Buy?
I will use a single-stage dividend discount model to judge VYM’s value. The single-stage dividend discount model considers several factors I have discussed thus far.
- Current annual dividend payment – $2.84 per share
- Projected dividend growth – 6.0%
- My desired annual return on investment – 10%
Using these assumptions, the dividend discount model calculates the fair value of VYM to be $75 per share.
The dividend discount model tells us that VYM stock is slightly overvalued. This is not surprising given the stock market’s recent climb to new highs.
But don’t let VYM’s current value scare you away. Invest small amounts in VYM each month.
In some months your VYM purchase will represent a good value. Offsetting the times when it is not. This is known as dollar-cost averaging.
More on investing small amounts, on a regular basis in a moment. But first, a couple more important questions to address about VYM.
Is VYM Tax Efficient?
The best way to minimize taxes is to hold VYM in a qualified retirement account. Such accounts are great for the tax benefits they provide.
In contrast, holding VYM in a taxable investment account means paying income taxes on the dividends paid. Fortunately, dividends receive preferential tax treatment. They are taxed at lower rates than ordinary income.
VYM is a passively managed index fund. As a result, stock trading is kept to a minimum. This reduces exposure to capital gains taxes.
Overall, ETFs like VYM are fairly tax efficient.
However, everyone’s tax situation is different. So, it is best to consult with your tax advisor for advice specific to your tax situation.
VYM Minimum Investment Requirement
An investor has to buy at least 1 share in an ETF to get started investing. This means you can get started for less than $100.
More About ETFs With High Dividend Yields And ETF Investing
Before we conclude, let’s cover a few other related topics. First up, a discussion about other high paying dividend ETFs.
But there’s more, so here’s an outline of the topics to come…
- Comparison of VYM to other dividend-paying ETFs
- Other Vanguard investment reviews from Dividends Diversify
- Dividend ETFs versus individual dividend stocks
- A case study: How I use VYM in my investment portfolio
- How to start investing in VYM as a beginning investor
- How VYM can compound a little money into a lot
After that, I will wrap up and conclude. But now let’s move through these important topics.
VIG vs. VYM vs. DGRO
There are several other exchange-traded funds with high dividends that you might consider.
Vanguard has a similar high dividend ETF fund called Vanguard Dividend Appreciation ETF (NYSE: VIG). It favors dividend stocks with lower dividend yields, but faster dividend growth than VYM.
iShares, by Blackrock, offers the iShares Core Dividend Growth ETF (NYSE: DGRO). In my opinion, it more closely resembles VIG with lower dividend yield and higher potential dividend growth.
But let me be honest, ETFs like VYM, VIG, and DGRO are low cost, passively managed investment products. And there is nothing wrong with that.
But, they are very similar. ETFs in this area are commodity-type products.
Next up, I want to point out some other Vanguard dividend paying ETFs.
Other Vanguard Investment Reviews
Now you have read about VYM. After thinking about it, maybe VYM does not meet your investment objectives? That’s for you to decide.
But, just in case you are still looking for that perfect investment, check out these other Vanguard investment reviews that I have prepared.
All of them are about high dividend paying ETFs.
Table 4: Vanguard ETF Investment Reviews
|ETF Description||Stock Symbol|
|A Vanguard ETF for fast dividend growth||VIG|
|International dividends from a newer Vanguard ETF offering||VYMI|
|Utility sector ETF||VPU|
Next, a brief discussion about the pros and cons of dividend ETFs versus individual stocks.
Dividend ETFs vs Individual stocks
What is the main advantage of high dividend ETFs versus selecting individual dividend stocks? It is the instant diversification an investor can have with a single purchase. Furthermore, there is no need to spend time researching and choosing the individual dividend stocks to invest in.
The primary disadvantage of dividend stock ETFs versus individual stocks is that the ETF will contain some stocks that may be poor investments.
With hundreds of stocks included, not all of them are great companies. Nor will all of them be high performing individual investments. With individual stocks, you can make sure each one is a good dividend stock.
I use the Simply Investing Report for high-quality individual dividend stock recommendations. In contrast, with an ETF you have to take the good with the not so good.
If you are interested in individual dividend stock recommendations, be sure to read my review about the Simply Investing report.
Next, you may be wondering how I use VYM in my investment portfolio?
Maybe my approach will work for you. Maybe not. But, it’s usually a good idea to see what other investors are doing. Then, decide for yourself. After all, it’s your money!
How I Invest in Vanguard’s VYM ETF
I utilize VYM in my investment portfolio in 2 primary ways.
Tax-advantaged accounts: I like VYM in my tax-advantaged self-directed IRA accounts. Why? Because of the diversification, it offers.
Due to annual contribution limits for these accounts, they are smaller in size. I do not want 1 or 2 poorly selected individual stocks to damage the value of these accounts. So I invest in VYM for diversification.
Taxable accounts: I invest in VYM during market extremes. Either when the market is at all-time highs or in a bear market.
During these periods, I generally lack conviction about individual stocks. So I find it easier to buy VYM. It takes the decision making of what stock to buy out of my hands. But it allows me to keep investing on a regular basis.
Finally, I use Personal Capital to manage my entire financial picture. Both spending and investments. Personal Capital is a great tool. And best of all it is totally free to sign up and use. You can check Personal Capital out here.
Now, if you are an experienced investor, you can skip this next section. It addresses how to get started investing in VYM, for beginners.
How To Invest in VYM As A Beginning Investor
A couple of years ago, I got my millennial niece started in dividend investing. And I recommended VYM for her.
I sent her a $250 Christmas present to electronically open an account and some instructions on how to do it. I think she had the account opened and made her first investment in VYM in about 15 minutes.
I still have the instructions I sent her in a text string. Here is what I advised her to do:
- Go to Vanguard’s website
- Go to open an account
- Open an individual account under general investing
- Link it to your bank account so you can electronically transfer the funds
- Sign up for e-delivery of statements and they waive the account application fee
- Electronically transfer the money to the Vanguard account from your bank account
- Place a market buy order to buy the number of VYM shares you wish to purchase
- Elect to automatically reinvest all dividends
It’s as simple as that. My niece officially became a dividend stock investor! And you too can buy just 1 share to get started.
You do not have to have an account with Vanguard. There are many other free stock brokerage account options. I use and recommend Webull.
And for a limited time, Webull is giving away free stock when you open and fund your account.
Think Long Term
Just be sure to stay invested over the long term. And add money to your shares on a consistent basis. Understand that if the stock market goes down, you will lose money in the short term.
There are no guarantees, but history suggests the odds are in the investor’s favor. And, if you have a long term perspective, investing in quality dividend stocks usually works out just fine.
How VYM Can Turn $50 into $150,000
Here’s an example of why you need to think long term. And how you can turn $50 into $150,000.
- Invest $50 per month into VYM
- Earn a 7.3% annualized investment return
Disregarding income taxes and the benefit of reinvesting the dividends after paying the taxes, it will take about 40 years to turn a $50 monthly investment into $150,000.
This may seem like a long time. It can be done a little faster by reinvesting the dividends after paying your income taxes. But realize, over that 40 year period, you are only investing $24,000 to get $150,000 at the end.
Think of it this way. Saving and investing $50 per month is less than 2 bucks per day.
How To Find That $50 To Invest In VYM
We all have to spend money. Just be smart about it.
Do you need help finding that $50 to get started investing? Then, here are a couple of suggestions.
One way I like to save money when I have to spend it is by getting cashback from Rakuten.
You should definitely sign up for Rakuten to save money on every dollar you spend online. It’s free to join and they offer new members a $10 cash bonus!
Ibotta is another excellent cashback app we use to save money. Be sure to give Ibotta and Rakuten a try.
Every little bit of savings count. Savings are what feed your investments. Investing wisely is what builds wealth!
Okay. Let’s wrap this up by summarizing the facts about VYM. And I will offer my opinion on its investment prospects too.
VYM Fact Sheet & Summary
Here is a quick fact sheet and summary from this article about the Vanguard High Dividend Yield ETF – VYM:
- Moderate dividend yield of 3%+
- Nice dividend growth projected at 6-7%
- Diversification among 400+ dividend stocks
- Low cost
- Low initial investment requirement
- Slightly overvalued at recent prices
Is VYM A Good Investment?
I have owned VYM for many years and believe it it a good investment.
The VYM ETF provides consistent dividend income now. And, attractive dividend growth for increasing dividend income going forward.
The fund is an excellent way to participate in the gains from the U.S. stock market through a large diversified basket of blue-chip dividend-paying companies.
More Reading on Dividend ETFs And Dividend Investing
- Can you live off dividends?
- How to build a Vanguard 3-fund portfolio paying dividends
- How to build a portfolio of blue-chip stocks paying dividends
- Dividends Still Don’t Lie – Book Review
Resources From My High Yield Dividend ETF Toolkit
- Free stock trading with the Webull app
- Quality investment research from Morningstar
- Dividend stock recommendations from Simply Investing
- Manage your entire financial life with Personal Capital
Disclosure & Disclaimer
This article, or any of the articles referenced here, is not intended to be investment advice specific to your situation. I am not a licensed investment adviser, and I am not providing you with individual investment advice. The only purpose of this site is information & entertainment. We are not liable for any losses suffered by any party because of information published on this blog. See this site’s Disclaimer and Privacy tab for more information.