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A Fine Dividend Yield Fund From Vanguard

Silver-rated Vanguard High Dividend Yield delivers an attractive yield while keeping risk in check.

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The following is our latest Fund Analyst Report for Vanguard High Dividend Yield Index Inv (VHDYX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Vanguard High Dividend Yield Index is one of the cheapest dividend strategies available. The fund’s broad diversification and market-cap-weighting approach help curb risk and support a Morningstar Analyst Rating of Silver.

The fund fully replicates the FTSE High Dividend Yield Index, which targets stocks representing the higher-yielding half of the U.S. dividend-paying market, excluding REITs. This well-diversified portfolio weights its holdings by market capitalization. This approach delivers an attractive yield while keeping risk in check. Although it doesn’t screen for quality and may own some firms with weak fundamentals, it has limited exposure to firm-specific risk. The portfolio leans toward larger stocks, which tend to have stronger balance sheets and exhibit lower volatility than their smaller counterparts. Market-cap weighting also harnesses the market’s collective wisdom about the relative value of each holding and helps mitigate turnover.

This portfolio tends to have a more pronounced value tilt and higher dividend yield than the Russell 1000 Value Index. This portfolio has also tended to hold up a little better than that benchmark during market downturns. This is partially because large dividend payers tend to be mature firms with more stable cash flows than most. The market tends to punish firms that cut their dividends, so most firms won’t commit to them unless they are confident they will be able to honor them. As a result, firms with erratic cash flows are less likely to make their way into this portfolio.

Vanguard charges a 0.14% annually for this fund. It is one of the least expensive dividend income funds in the large-value Morningstar Category, which has translated into strong category-relative performance.

Performance | Positive | by Venkata Sai Uppaluri Sept. 24, 2019
This fund earns a Positive Performance Pillar rating based on its strong long-term risk-adjusted returns relative to its category peers. Over the trailing 10 years through August 2019, the fund outperformed the Russell 1000 Value Index by 92 basis points annualized, with lower risk. On a risk-adjusted basis, the fund outperformed the large-value category average. Much of this relative outperformance can be attributed to the fund's cost advantage, lower-than-average cash drag, and more-favorable stock exposure in the energy, financial services, industrials, and technology sectors.

The fund ranked in the category’s top quartile over the trailing five and 10 years through August 2019, consistently outperforming the category average while exhibiting lower volatility. During that time, the fund also tended to hold up a little better than average during market downturns.

Price  | Positive | by Venkata Sai Uppaluri Sept. 24, 2019
Vanguard charges 0.08% for the Admiral share class of this fund. This fund’s expense ratio is attractive compared with other dividend-oriented offerings, which are typically more expensive than traditional market-cap-weighted index funds. The minimum investment for the Admiral shares is $3,000. The ETF share class charges just 0.06% annually and has no minimum beyond the price of one share. Over the trailing three years ended August 2019, the fund lagged the benchmark by about 15 basis points.

Process | Positive | by Venkata Sai Uppaluri Sept. 24, 2019
This fund fully replicates the FTSE High Dividend Yield Index. It effectively delivers a high yield, while keeping risk in check and promoting low turnover, supporting its Positive Process Pillar rating. This benchmark starts with all the U.S. dividend-paying stocks from the FTSE All-World Index but excludes REITs. FTSE ranks stocks by their 12-month indicated regular dividend yield based on I/B/E/S forecasts. It adds stocks to the index, starting with the highest-yielding names, until the portfolio’s cumulative market capitalization represents half of the selection universe’s market capitalization. To mitigate turnover, constituents may stay in the index as long as they fall in the highest-yielding 55% of the selection universe by market cap. The index adds new stocks once they break into the highest-yielding 45% of the investable universe. It reconstitutes semiannually in March and September.

Aggressively chasing yield can lead to risky areas of the market because the highest-yielding stocks may have weak fundamentals and be prone to cutting their dividend payments. These companies tend to pay out a large share of their earnings and often have a narrow buffer to cushion these payments if their business deteriorates.

Although this fund screens only for yield with no checks for quality, it keeps risk in check by diversifying across hundreds of names and weighting them by market cap. Because it casts a wide net, a few bad apples shouldn’t derail performance. And the fund leans toward large stocks, which are more likely to have competitive advantages and should be better equipped to maintain their dividend payments than smaller stocks. Market-cap weighting also incorporates knowledge of the market and reduces the fund’s exposure to stocks as their prices deteriorate.

Like most dividend-oriented strategies, this fund has a value tilt. Larger and slower-growing firms tend to trade at lower valuations and pay out a larger share of their earnings as dividends than their faster-growing counterparts. The fund’s holdings tend to generate higher average returns on invested capital than those in the Russell 1000 Value Index and the category. It tends to have greater exposure to the consumer defensive sector and less exposure to financials than its typical peer.

People | Positive | by Venkata Sai Uppaluri Sept. 24, 2019
This fund is managed by a talented and experienced team supported by sophisticated technology, which deserves a Positive People Pillar rating.

William Coleman and Gerard O'Reilly manage this fund. Coleman has been with Vanguard since 2006 and has served as a named portfolio manager there since 2013. O'Reilly joined Vanguard in 1992 and has served as a portfolio manager since 1994. Both managers are members of Vanguard's Global Equity Index Group, which offers trade execution and risk-management support for the fund. Vanguard's team approach keeps its portfolio managers' workload manageable.

Index portfolio management at Vanguard is a team effort. Often an individual will take responsibility for a single corporate action across all portfolios. Additionally, other portfolio managers are available to back up the listed portfolio managers. The portfolio managers are responsible for trade execution, which is helpful because they likely have a deeper understanding of the portfolio holdings than a dedicated trader might have.

The managers are supported by an index analytics team, which is tasked with communicating with index providers and researching upcoming changes to the underlying index. The team then briefs the portfolio managers on specific changes, enabling them to focus solely on portfolio management and trading.

Parent | Positive June 5, 2018
The Vanguard Group is the world's biggest provider of open-end funds and its second-biggest provider of exchange-traded funds. Innovative and iconoclastic from its mid-1970s origins, the firm's mutual ownership structure, commitment to low fees, and sensible active and passive investment strategies are hallmarks that support its Positive Parent rating.

Vanguard is committed to serving all investors, not just its own. Indeed, the firm celebrates when its entry into an asset class prompts rivals to lower their fees to remain competitive, as occurred when Vanguard launched index funds in London in 2009 and factor-based strategies in the United States in early 2018.

New CEO Tim Buckley, Vanguard's fourth, faces the challenge of expanding the firm's mission to non-U.S. investors, who currently account for less than a tenth of the firm's $5 trillion in global assets under management. He must also navigate the tension between Vanguard's burgeoning discretionary asset-management business, Personal Advisor Services, and financial advisors who may feel threatened by the firm's efforts to lower the cost of investment advice. Perhaps Vanguard's greatest challenge, though, will be keeping pace with its own growth, especially in overcoming the service problems that have bedeviled the firm the past few years. Vanguard's 2017 implementation of client-experience testing labs should help the firm improve there, too.

Venkata Sai Uppaluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.