Why Vanguard High Dividend Yield Index Fund Is One of the Best

Key Morningstar Metrics for Vanguard High Dividend Yield Index Fund VYM

• Morningstar Medalist Rating
  : Gold
• Process Pillar
  : High
• People Pillar
  : Above Average
• Parent Pillar
  : High

Vanguard High Dividend Yield strikes a nice balance between higher-yielding stocks and distressed yield traps. Its ability to manage risk should provide an advantage over most of its Morningstar Category peers.

This fund tracks the FTSE High Dividend Yield Index. It starts with large- and mid-cap stocks in the FTSE USA Index, excluding REITs, and ranks them by their expected dividend yield over the next 12 months. The index selects those representing the higher-yielding half of eligible dividend-paying stocks. Selected holdings are weighted by float-adjusted market cap, pulling the portfolio toward larger, more stable stocks.

Focusing on dividend yield gives the portfolio a value orientation that can open the portfolio to risk. Yield traps, or stocks with untenably high dividends, pose a significant risk to dividend funds. But this strategy limits its exposure to risky companies. Sweeping half the dividend-paying universe into its portfolio diversifies stock-specific risks and limits the influence of distressed firms. Market-cap weighting also emphasizes larger, more stable firms that should have the capacity to continue making dividend payments. This mitigates the impact of yield traps because their weight drops as their prices fall.

Leaning toward stable companies comes at the cost of maximizing dividend yield. But the fund’s yield still typically surpasses the Russell 1000 Value Index by about 1 percentage point. Stability extended to performance as well, with the fund historically experiencing a standard deviation consistently lower than its category bogy.

Like other dividend funds, this portfolio’s sector composition can deviate substantially from the category index, owing to its yield orientation. Market-cap weighting normally keeps these differences small, but the fund’s yield screen can still exclude a significant portion of the market during extreme conditions. Between 2010 and 2018, for instance, the fund’s allocation to financial stocks was anywhere from 15 to 20 percentage points below the category average. This is an artifact of the post-financial-crisis dividend cuts across much of the sector. While this did not hurt the fund’s performance significantly, sector bets tend to be an uncompensated risk.

This fund’s cost-conscious approach sets it apart from the crowd. Its 0.06% fee is among the lowest in the large-value category.

Vanguard High Dividend Yield Index Fund: Performance Highlights

Emphasizing large, profitable dividend-payers helped this fund weather stormy markets better than the Russell 1000 Value Index. Since its 2006 inception through September 2026, the fund beat its benchmark by 68 basis points annualized with lower volatility, putting the fund even further ahead of its bogy in risk-adjusted terms.

This fund has beaten its category index consistently since inception. Outperformance during periods of market stress has been a hallmark. For example, this fund beat its category benchmark by 3.62 percentage points during the coronavirus-driven selloff between Feb. 19, 2020, and March 23, 2020. This fund’s advantage grew during rocky markets in 2022, with the fund besting its category bogy by over 7 percentage points over that period.

But this fund isn’t immune to drawdowns. It still fell 34.0% in the pandemic selloff and dropped 0.42% in 2022. However, it should continue to carve out an edge over its category index and peers over the long run, thanks to low costs of ownership and a solid strategy.