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It’s been a decent though unspectacular year for dividend stocks and the related exchange traded funds. While the largest ETFs in that category have posted positive year-to-date returns, those funds are trailing the S&P 500 by wide margins.
That’s true of both dividend growth and high payout funds and it’s partially the result of the bull market being led by low-yielding or non-dividend mega-cap growth stocks. Looking at the magnificent seven cohort, Alphabet (NASDAQ: GOOGL), Meta Platforms (NASDAQ: META) and Nvidia (NASDAQ: NVDA) are low-yield names while Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA) aren’t dividend payers.
With the exception of Tesla, those stocks are among this year’s market leaders, perhaps prompting some investors to think the case for dividends is waning. Actually, the opposite is true. Equity income is essential in retirement planning, among other pursuits, and with the Federal Reserve’s September rate cut, the case for dividend stocks may have gotten a much need refresh.
That could compel advisors and investors to revisit payout ETFs, including the Vanguard High Dividend ETF (NYSEARCA: VYM).
The View on VYM
VYM turns 18 years old next month and is one of the largest ETFs in the dividend category. While the ETF is framed as a high dividend strategy, it’s not excessively allocated to the sectors with the biggest dividend yields. Yes, VYM’s weight to utilities stocks is 7% -- above market weight – but the fund also has no exposure to real estate names.
Among high payout ETFs, VYM has a comparatively large roster – one populated by 550 stocks – confirming it’s not overly dependent on the highest of the high-yield fare. That’s a plus because history has shown some companies with what appear to be tantalizing payout yields ultimately prove to be dividend offenders by way of cuts or suspensions.
High dividend strategies typically sport the value classification and that’s true of VYM. The Vanguard ETF lagged the S&P 500 Value Index over the past three years. One reason for that is because VYM features no exposure to Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) because that stock doesn’t pay a dividend, but the fund has its set of advantages.
“Value traps, or stocks with deteriorating fundamentals and declining prices, pose a significant risk to dividend funds,” notes Morningstar analyst Bryan Armour. “But this ETF limits its exposure to risky companies. Sweeping half of the dividend-paying universe into its portfolio diversifies stock-specific risks and limits the influence of distressed firms.”
VYM for the Long-Term
As advisors know, dividend stocks and ETFs aren’t designed to create overnight riches, but these instruments are pivotal in long-term wealth creation.
Translation: VYM could well have a wide audience among clients, particularly those with extended time horizons, due in part to its annual fee of just 0.06%, which is among the lowest in the category. Plus, the fund’s historical performance confirm it has rewarded patient investors.
“This ETF has consistently beat its category index since inception. Outperformance during periods of market stress has been a hallmark,” concludes Armour. “For example, this ETF beat its category index by 3.62 percentage points during the covid-19 selloff between Feb. 19, 2020, and March 23, 2020. Its advantage grew again during rocky markets in 2022, with the fund besting its bogy by over 7 percentage points over that period.”
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