DIVO - VYM: Just Isn't Interesting As It's Leaving Yield And Returns On The Table

Summary

• With the CDs and treasuries yielding over 4%, VYM isn't an interesting high dividend yield ETF anymore.
• VYM has done a respectable job at generating a yield that exceeds traditional index funds and generating capital appreciation over the years.
• Unfortunately, VYM has underperformed SCHD and DIVO and isn't as attractive as it once was moving forward.
• There is less of a reason to invest in VYM in 2023 for yield when more high-yield products are available and non-risk options are yielding over 4%.

People invest with different goals in mind, and two individuals can allocate capital toward the same investment for completely different reasons. I have been a shareholder of the Vanguard High Dividend Yield ETF ( VYM ) for quite some time, and while it’s a perfectly good dividend fund, it’s becoming less and less interesting. When I invested in VYM, I took a chunk of capital and invested in a bunch of different ETFs. We were living in a low-yield environment, and I believe the interest rates were sub-1%. I wanted a portion of the capital to be invested in quality dividend funds, and in addition to VYM, I also allocated capital toward the Schwab U.S Dividend Equity ETF ( SCHD ), and the SPDR Portfolio S&P 500 High Dividend ETF ( SPYD ). My reasoning was that I didn’t want all my eggs in one basket, and I wanted diversification across the ETFs to try and mitigate downside risk with different investment strategies. Times have changed, as yield is easy due to the introduction of more yield-focused investment products, and short-term CDs and Treasuries are generating a 4%+ APY. After reviewing many of my investments, VYM just isn’t as appealing as it once was. I am currently undecided about exiting the position and reallocating the capital, but if I were making the initial investments today, VYM probably wouldn’t make the cut.

VYM claims to be a High dividend yield ETF but is it?

VYM had an inception date of 11/10/2006, and shortly after, the U.S. entered into an extended period of sub 1% interest rates . Until recently, interest rates spent minimal time over the 2% level. When we lived through a low-yield environment, a 3% yield on an ETF was very enticing, but after the Fed continued to raise rates throughout 2022, the Fed Funds rate now sits at 4.33%. I believe the definition of high dividend yield is subjective and open to interpretation on an individual basis. For some, VYM could fit the definition as a standard index fund, such as the Vanguard S&P 500 ETF ( VOO ) has a 1.58% yield. For others, anything falling under the Fed Funds rate may not be classified as a high dividend yield opportunity.

Today, Marcus by Goldman Sachs ( GS ) is a high-yield 12-month CD with an APY of 4.4%. Barclays also has a 12-month CD option paying an APY of 4.25%. When looking at treasury notes , the 10-year is yielding 3.5%, and the 2-year is yielding 4.13%. These investments lack equity risk, and as long as they are held to maturity, they will not lose value. The combination of 4% plus yields and the absence of risk make these investments much more appealing from a yield perspective. Some investors aren’t just looking for yield and want a combination of appreciation and yield, but for those specifically looking for income, 4%+ without equity risk is very interesting.

In 2023, I am unsure if VYM qualifies as a high-dividend yield ETF, and in my opinion, it’s not. From my perspective, to be a high-yield investment, the yield would need to exceed a 1-year CD or 2-year treasury note by at least 2%. If I am going to assume the risk from exposure to equities, the yield needs to be substantially higher than a no-risk option that the U.S Government guarantees.

There are many other options for a high-yield ETF option or even a CEF option. The JPMorgan Equity Premium Income ETF ( JEPI ), which has become very popular, amassing over $20 billion in assets under management, has a yield of 11.76%. The InfraCap Equity Income Fund ETF ( ICAP ), which is a small underfollowed fund, only has $35.26 million in assets under management, but its yield is 8.06%. The Amplify CWP Enhanced Dividend Income ETF ( DIVO ) has $2.68 billion in assets under management and yields 5.14%. There are certainly other ETF’s out there that have larger yields than VYM that are more appealing from an income perspective. If I was to look at CEF’s, one of my favorites is the PIMCO Dynamic Income Fund ( PDI ) which has $4.56 billion in assets under management and yields 12.58%. In today’s market, high yield isn’t lacking, and there are more options than before. I don’t believe VYM is an appealing option for high-yield, but that doesn’t mean there isn’t a place for it in your portfolio.

VYM is more of a hybrid fund, but even with a strong track record, money is still left on the table

VYM has been a net positive investment for me and has accomplished its goal of generating capital appreciation and generating a larger dividend than the traditional index and total market funds . I purchased my original batch of VYM at the end of 2017 when shares were $82.67 and added to the position at the beginning of 2019. I have reinvested each dividend along the way, and since my initial investment, my share base has increased by 14.73%, and my overall capital has grown by 52.72%. In roughly 5 ½ years, my annualized return has been 9.59%, which is nothing to complain about.

VYM provides investors with a convenient way to gain exposure to equities with above-average dividend yields through a passively managed fund. VYM employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index, which consists of common stocks of companies that pay dividends that generally are higher than average. VYM attempts to replicate the target index by investing all, or substantially all, its assets in the stocks that make up the Index. VYM is a massive fund with over $50 billion in assets under management, and for all intents and purposes, it does its job. The problem I have when looking at the account is that SCHD has generated a total return of 84.08% in my account over the same period, and I feel as if I am leaving money on the table. I purchased VYM and SCHD at the same time and made 1 addition to both funds along the way.

Looking at VOO and VYM, VYM has left a considerable amount capital on the table, which is to be expected. VOO is an S&P index fund, so I would expect there to be larger upside potential since it has stocks like Tesla ( TSLA ), and Amazon ( AMZN ) as part of its holdings. A $10,000 investment in VOO with the dividends reinvesting over the previous 10-years would have grown 225.98% for an average annual return of 12.55%. The same investment in VOO would have increased by 184.39% for an average annualized return of 11.02%.

When I compared VYM to SCHD, I was surprised that the amount of capital left on the table was larger than with VOO. SCHD and VYM are both high dividend yield ETFs, but SCHD has outperformed VYM by a substantial amount. The same $10,000 investment in VYM that grew 184.29% with the dividends reinvesting would have grown by 244.65% if the capital was put in SCHD. SCHD has had an average annual rate of return of 13.18%, which is 2.16% larger than VYM over the past decade.

DIVO is a newer fund, and the data goes back to the end of 2016. DIVO has a slightly larger yield than VYM and SCHD, and I think is a better definition of a high-yield fund as its yield has exceeded CDs and treasuries since its inception. A $10,000 investment in VYM since 12/15/16 would have grown to $17,479.61, which is a 74.83% return. This is an annualized rate of return of 9.5%. The same investment in DIVO would have generated a 98.08% return as it would have become $19,810.14. DIVO would have generated an annualized return of 11.75%.

Conclusion

I am still invested in VYM, and it has done its job, but there has been capital left on the table. If I had to reallocate the capital today, VYM would not be in my investment mix based on its returns. While VYM is a satisfactory option for a hybrid strategy, I don’t think it’s the best investment out there. I also don’t believe VYM should be considered a high-yield dividend ETF, because investors can generate a larger yield from CDs with zero risk. I will not be adding to my position in VYM, and I am considering exiting the position and reallocating the capital as SCHD’s results are extremely compelling compared to VYM’s.

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