Vanguard High Dividend Yield ETF (VYM) is a compelling option for exposure to stocks with generous dividend payments. It offers both an attractive dividend yield without taking excessive risk and a sizable cost advantage relative to its peers (0.09% expense ratio). The strategy starts with all U.S. dividend payers (excluding REITs and smaller stocks), targets those representing the higher-yielding half, and weights them by market capitalization, which keeps implementation costs low. This creates a portfolio of more than 400 names that leans toward mature giants such as Microsoft (MSFT), Johnson & Johnson (JNJ), and AT&T (T). Most of these firms are growing more slowly than the broad market, giving the fund a value orientation.
High-yielding stocks tend to pay out a larger share of their earnings than average, leaving a smaller buffer to preserve dividend payments should earnings fall. And some of the highest-yielding stocks may face financial distress. Indeed, the fund has invested in some stocks that have cut their dividends, like ConocoPhillips (COP). At the end of 2015, ConocoPhillips offered a 6.4% dividend yield, but after losing money in 2015 because of low oil prices, the firm cut its quarterly dividend to $0.25 per share from $0.74 in February 2016 in order to conserve capital. But the fund effectively diversifies this risk with its broad reach and market-cap-weighting approach. In fact, its portfolio represents nearly 39% of the assets in the broad Russell 3000 Index.
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Alex Bryan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.