Dividend stocks and exchange traded funds are ideal for long-term investors and fit nicely into tax-advantaged accounts, including individual retirement accounts.
Remember that when a company pays a dividend, that's a taxable event and shareholders pay taxes on those dividends, unless the dividend-paying security resides in a tax-advantaged account.
What Happened
The Vanguard High Dividend ETF VYM, one of the largest U.S. dividend ETFs, is among the payout funds suitable for inclusion in retirement accounts for multiple reasons. In addition to its dividend profile, VYM charges just 0.06 percent per year, or $6 on a $10,000 investment, making it one of the least expensive dividend funds on the market. The less investors pay in fees, the better their long-term returns are likely to be.
Second, VYM's volatility profile is favorable. Over the past three years, the Vanguard fund has been 130 basis points less volatile than the S&P 500.
Why It's Important
There are other advantages to consider with VYM and how the fund can be implemented in IRAs.
“One, dividends impose discipline on managers,” said Morningstar in a recent note. “It prevents them from hoarding cash and makes it harder for them to invest in low-return pet projects and things like that. But also dividends allow investors the fortitude to stay invested through the markets' rough patches.”
While dividend stocks do decline when broader markets falter, their declines are often less than those of the broader market's and as VYM shows, dividend payers can be less volatile.
“Yes, during market downturns, these stocks will go down, but you will still be able to collect the dividend payments,” said Morningstar. “For a lot of investors, that can give them the fortitude to stick with these investments through thick and thin, and it can be easier than holding nondividend-payers.
What's Next
VYM holds 396 stocks with a median market value of $109.3 billion, according to issuer data. While it's positioned as a high dividend strategy, VYM has no real estate exposure and allocates just 8 percent of its weight to utilities stocks. The financial services and health care sectors combine for 29.20 percent of VYM's weight.
Morningstar has a Silver rating on VYM.
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