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A Classic High Dividend ETF Still Looks Strong

June 17, 2019 8:16 am
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A Classic High Dividend ETF Still Looks Strong

The Vanguard High Dividend ETF (NYSE:VYM) is one of the largest domestic dividend exchange traded funds, ascending to favored status among income investors due to a combination of low fees and an emphasis on high dividend stocks with yields that are not so high that the payouts are at risk of being cut.

What Happened

VYM's success spurred the creation of an international counterpart, the Vanguard International High Dividend Yield ETF (NASDAQ:VYMI). VYMI follows the FTSE All-World ex US High Dividend Yield Index, which is a collection of ex-US dividend payers with above-average yields. This is not a dedicated developed markets fund as 21.4% of VYMI's 1,021 holdings hail from emerging markets.

Indeed, VYMI's yield of 4.22% is above average. That is nearly 200 basis points higher than the yield on the MSCI All Country World ex-US Index.

“Strategies that emphasize stocks with high dividend yields can be attractive for the income that they provide, and regular dividend payments can help investors stay invested through market downturns,” said Morningstar in a recent note. “But high dividend yields are often a consequence of price declines, and high-yielding stocks tend to trade at lower valuations than the broader market. Declining stock prices are usually caused by weakening fundamentals and poor growth prospects, which makes them risky.”

Why It's Important

How high-yield dividend funds are constructed matters. VYMI has a sturdy template to follow in its established domestic counterpart VYM, a fund with an above-average yield, but surprisingly low allocations to sectors often viewed as high-yield destinations.

VYMI “mitigates the impact of risky stocks through broad diversification and weights its holdings by market cap,” said Morningstar. “This approach emphasizes large, stable firms and can indirectly tilt the portfolio toward companies that are highly profitable and more likely to continue their dividend payments.”

The median market value of VYMI's holdings is $41.4 billion and the fund is not risky at the geographic level as the U.K. and Japan combine for about a third of the fund's weight. Foreign dividends can be more volatile than U.S. payouts and VYMI seeks to temper some of that volatility by not capping sector weights, which can lead to some large sector-level bets.

“This approach was intentionally employed to preserve the emphasis on stocks with high dividend yields,” said Morningstar. “Currently, this fund has 35% of its assets in stocks from the financial-services sector compared with 22% for its starting universe. This bias is a source of sector-specific risk.”

What's Next

While VYMI features some emerging markets exposure, its returns and annualized volatility over the past three years are more comparable to major ex-US developed markets benchmarks. Morningstar has a Bronze rating on VYMI.

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