Looking for Stability? This High Dividend Yield ETF May Be Perfect

Vanguard’s High Dividend Yield ETF (VYM) is a popular income investment that combines high dividend income potential with Vanguard’s characteristic passive management and low expenses.

With the NASDAQ now actively in a correction and other indices also struggling, now may be a good time to consider defensive, dividend-generating stocks.

Is VYM a good ETF to buy, and how does the fund compare to the stock market as a whole?

Key Points

• VYM’s 2.5% yield doubles that of the S&P 500.

• Delivered 10.1% annualized returns with a lower P/E vs S&P 500, offering steady appreciation with less overvaluation risk.

Why Own a High-yield Fund Like VYM?

The first and most obvious reason for owning a fund like VYM is for its income potential. Many investors looking for active cash flow from their portfolios turn to high-yield funds for a combination of income potential and diversification. These funds may be especially useful for those approaching retirement, as they give investors a reliable income while still leaving room for some growth.

Dividend stocks may also offer investors a degree of security during turbulent macroeconomic times and stock market downturns. Dividend stocks have fared better than the market as a whole in several recessions over the past few decades, making them a popular choice for investors seeking defensive assets. The income these stocks produce can also help to bolster total returns, another reason for their popularity during periods when growth stocks become less attractive.

A final reason to look at a high-yield ETF is the fact that dividends have historically contributed a great deal to overall stock market returns.

Over the last century, dividends have accounted for over 30% of the total returns of the S&P 500, making them an extremely important part of an overall investment portfolio.

High-yield ETFs take advantage of this fact by focusing on companies that deliver high, stable and gradually growing dividends.

A Brief Look at VYM’s Portfolio

VYM is a large-value fund that tracks the FTSE High Dividend Yield Index. As such, the fund is made up of stocks that produce higher-than-average dividend yields. VYM currently contains 530 individual stocks and is concentrated in sectors traditionally associated with higher distributions.

Nearly 24% of VYM, for instance, is in the financial sector. Consumer staples, consumer discretionary, health care, industrials and tech all also account for 10% or more of the total portfolio. Energy comes in just barely below the double-digit threshold, making up 9.1% of the portfolio.

Turning to individual stocks, the top 10 holdings in VYM’s portfolio are as follows:

• Broadcom (NASDAQ:AVGO)
• JPMorgan Chase (NYSE:JPM)
• Exxon Mobile (NYSE:XOM)
• Walmart (NYSE:WMT)
• Home Depot (NYSE:HD)
• Procter & Gamble (NYSE:PG)
• Johnson & Johnson (NYSE:JNJ)
• AbbVie (NYSE:ABBV)
• Bank of America (NYSE:BAC)
• Wells Fargo (NYSE:WFC)

How High Is VYM’s Dividend?

At the moment, VYM yields 2.5%, which is well below what many REITs and some high-dividend individual stocks produce. It does, however, compare very favorably to the market as a whole. Vanguard’s VOO fund, which tracks the S&P 500, generates less than half of VYM’s yield at just 1.2%.

Despite being composed of mostly mature companies with long dividend histories, VYM also stands up fairly well in terms of dividend growth. Over the last 10 years, VYM has delivered a compounded dividend growth rate of 6.2%. VOO has fared only a bit better, with its dividend rising on average 6.8% per year.

VYM’s Appreciation Over Time

Even for a dividend-producing asset, it’s also important to see price appreciation over time as a component of total returns.

In the last 10 years, VYM has appreciated by 10.1% annually. VOO, meanwhile, has delivered annualized returns of 12.9% over the same period. So, while VYM hasn’t grown quite as quickly as the S&P 500, the fund has held its own and delivered fairly strong cumulative returns for its shareholders.

One thing that is interesting to note is the fact that VYM’s focus on large, established companies with long histories tends to allow it to fare better during periods of volatility. YTD, for instance, VOO has gained just 1.4% as a combination of tariff worries, AI selloffs and other concerns have rocked the market.

VYM, however, has delivered a YTD gain of more than 5%. While there’s always risk where stocks are concerned, the dividend-producing stocks in VYM’s portfolio may be more stable during tough times than the high-growth tech companies that are currently driving the S&P 500.

Comparing VYM’s Valuation to the S&P 500

One of the most common concerns for investors at the moment is that the stock market at large could be overvalued. Here again, VYM may offer certain advantages when compared to the rest of the market. While VOO has an average P/E ratio of 27.5, VYM’s is much more modest at 19.8. It should be noted, though, that VOO’s earnings growth rate of 18.9% is much higher than VYM’s at 10%. As such, while VYM is priced more attractively to current earnings, it doesn’t stack up as well on a price-to-earnings-growth basis.

Here, it’s important to acknowledge that VYM isn’t driven by the highly-valued tech companies that account for about the upper third of the S&P 500. Without these high-priced, high-growth firms, VYM is priced at a more ordinary valuation but doesn’t have the potential to capture mega-cap tech growth. This may actually be a strength of the fund right now, as the Magnificent Seven stocks have largely stalled out so far this year. Without being so closely tied to this small handful of stocks, VYM isn’t as susceptible to shocks that affect the tech market.

Is VYM a Good ETF to Buy Now?

At the moment, VYM could be an appealing fund for investors looking for high dividend yields and a bit of stability in their portfolios. Although the fund hasn’t quite kept up with the S&P 500, its long-term track record of both appreciation and dividend growth combined with its superior dividend yield could make it a good investment. VYM could be especially useful as part of a multi-fund portfolio, as it may have the ability to balance off higher-growth alternatives with its steady stream of income.