Value And Yield Meet In This Dividend ETF

Home to nearly $14 billion in assets under management at the end of May, the Vanguard High Dividend Yield ETF VYM is one of the largest U.S. dividend exchange-traded funds. VYM has ascended to that status for some valid reasons.

Searching For Yield

On a trailing 12-month basis, VYM yields nearly 3.1 percent. That is almost double the 1.58 percent yield on 10-year Treasurys at last Friday's close. VYM follows the FTSE High Dividend Yield Index, “which measures the investment return of common stocks of companies characterized by high dividend yields,” according to Vanguard.

An interesting element to VYM is that although it positions itself as a high-yield ETF, it is actually lightly allocated to some of the highest-yielding sectors. That can work in the ETF's favor. Simply because a stock sports a tempting yield does not mean investors should give into that temptation. Some high-yield stocks got that way because of financial distress and high-yield stocks can be signs that negative dividend action is on the way.

Market Risk And Tailwinds

“Despite taking less market risk and exhibiting slightly lower volatility than the Russell 1000 Value Index, the fund outpaced this benchmark by 1.6 percentage points annually from its inception in November 2006 through May 2016. This was due to its greater exposure to consumer defensive stocks, smaller exposure to financial-services stocks, and differences in stock holdings within several sectors,” according to a recent Morningstar note on VYM.

Related Link: Another High-Yield Bond ETF To Consider

At the end of May, VYM's combined weight to telecom and utilities, two of the highest-yielding sectors, was just 13.8 percent. However, the ETF devoted 10.5 percent of its weight to energy names, the sector that accounts for the most negative dividend actions in the S&P 500 dating back to last year.

VYM and other ETFs with a focus on shareholder rewards, including dividends and buybacks, are worth examining right now not only because interest rates are low, but also because S&P 500 member firms continue returning cash to shareholders.

S&P Dow Jones Indices “notes that total shareholder return through regular cash dividends, as well as buybacks, set a record quarter at $257.6 billion, up from the previous record of $245.3 billion, which was set in Q4 2015. Dividends, which had posted seven consecutive quarters of record payments, declined in Q1 2016, as energy dividend cuts pulled the aggregate down. For the 12-month period ending March 2016, companies returned a record $974.6 billion in buybacks and dividends to investors, marking its fourth consecutive record and surpassing the prior record (annual or 12-months) of $954.6 billion, set in Q4 2015,” said the index provider.

International Peer

VYM has an international equivalent, the Vanguard International High Dividend Yield ETF VYMI, which debuted earlier this year.

VYM's “value and profitability tilts will likely continue to influence its performance. Both of these characteristics have been associated with higher returns over the long term, but they don't always pay off. For instance, in the United States, value stocks have lagged their growth counterparts over the fund's life, which detracted from its performance. But its profitability tilt gave it a small return boost,” added Morningstar.