Vanguard High Dividend Yield ETF (NYSEMKT: VYM) It has a dividend yield of 2.7%. That may not sound like a high yield, but it is more than twice the average of stocks in the S&P 500 (SNPINDEX: ^GSPC)which yields just under 1.2%. That comparison is interesting in another way, and it highlights the value that the Vanguard High Dividend Yield ETF provides – even if you only have $200 to invest right now .
The first thing investors need to understand about any exchange traded fund (ETF) they buy is the investment method. These are pooled investment products, so you're really hiring someone else to handle the investment process for you. You have to make sure you know what they are doing.
Vanguard High Dividend Yield ETF is an index-based ETF, meaning it simply mimics an index. That index is the FTSE High Dividend Yield Index.
The FTSE High Dividend Yield Index is quite simple. The first step in creating the index is to select all dividend paying companies on US exchanges. The second step is to rank all those companies according to their product, from highest to lowest. The third step is to include the top 50% in the index.
The index is weighted by market cap, so the biggest stocks have the biggest impact on performance. That's pretty easy to understand and clearly focuses investors on the highest yielding stocks. The cost for all this is a tiny 0.06% expense ratio.
Some dividend investors may balk at this point, wondering how an ETF designed to buy the highest-yielding stocks can have a yield that seems fairly modest in absolute terms. The answer depends on the number of stocks included in the portfolio.
Just like the S&P 500, the Vanguard High Dividend Yield ETF holds about 500 stocks. While all of them pay dividends, the index it tracks actually pushes fairly low into the yield range of all dividend-paying stocks. He has no choice, given the sheer number of dividend-paying stocks.
But here's the interesting thing: Until a few very large companies began to dominate the S&P 500's returns, the Vanguard High Dividend Yield ETF tracked fairly closely with the market's performance, as highlighted in the chart. Given the highly diversified portfolio he owns, that's not surprising. This suggests that for a dividend investor, this ETF could be switched to the S&P 500 as a core stock holding. It might even be a good time to consider a switch right now, given the dynamics driving the S&P 500 today.