VYMI - VYMI: International Dividend ETF Growing 4.7% Yield Some Momentum

2024-01-19 16:02:38 ET

Summary

• VYMI is one of the largest international dividend ETFs in the market.
• It offers investors a growing 4.6% yield, cheap valuation, and momentum.
• My assessment of the fund led me to a buy rating.

The Vanguard International High Dividend Yield ETF ( VYMI ) is a diversified index ETF focusing on international stocks with above-average yields. VYMI offers investors a good and growing 4.7% yield, a cheap valuation, and some momentum at its back. The fund is a strong investment opportunity, and a buy.

VYMI - Basics

• Investment Manager: Vanguard
• Underlying Index: All-World High Dividend Yield Index | LSEG
• Dividend Yield: 4.73%
• Expense Ratio: 0.22%
• Total Returns CAGR 5Y: 8.06%

VYMI - Overview and Analysis

Index and Portfolio

VYMI is an index ETF, tracking the FTSE All-World ex US High Dividend Yield Index . Said index includes the highest-yielding international stocks, until their cumulative market capitalization reaches 50% of the total market cap of applicable stocks. So, divide the market in two by yield, and invest in the higher-yielding half.

It is a broad index, which results in an incredibly well-diversified fund with investments in over 1,000 securities, broad-based industry and country exposure. Diversification is greater than that of most broad-based equity indexes, including the S&P 500 and the Nasdaq-100.

VYMI is overweight Europe, due to their comparatively large number of public equities.

The fund is overweight several old-economy industries, especially financials, due to their above-average yields. On the flipside, the fund is underweight tech, as few tech companies offer competitive yields. These industry tilts are quite common for international and dividend ETFs.

VYMI's larger holdings seem to be a combination of well-known international blue-chip stocks, including Novartis ( NVS ) and Roche ( RHHBY ) , and the larger international energy/commodity players, including Shell ( SHEL ) and TotalEnergies ( TTE ). Energy is somewhat overrepresented in the fund's top holdings, overall allocations are only somewhat above-average at 10%.
**Editor's note: the NOVN ticker and the ROG ticker are both the Swiss tickers for Novartis and Roche.

Overall, the fund provides investors with diversified exposure to international stocks, with all the benefit that entails. In my opinion, the fund is diversified enough that it could function as a core portfolio holding.

Valuation Analysis

International equities generally trade at a discount to U.S. equities, as investors are willing to pay premium prices for the strength and resilience of the U.S. economy. Discounts do vary, however, and are currently more than twice as wide as normal.

VYMI itself also trades at a massive discount to U.S. equities, and a slight discount to broader international equity indexes.

VYMI's cheap valuation could lead to significant capital gains and outperformance, contingent on valuations normalizing. Valuations could normalize for a myriad of reasons, including improved investor sentiment, economic fundamentals, or asset flows.

International equity valuations have remained abnormally low for so long that I'm not terribly confident that these will improve anytime soon. We've had periods in which these do improve somewhat, including late 2020 and early 2022, but most such movements proved temporary, and soon reversed themselves. I see no short-term catalyst for valuations improving.

VYMI's cheap valuation is equivalent to low share prices, which directly boost's the fund's dividend yield. Which brings me to my next point.

Dividend Analysis

VYMI offers investors a 4.7% dividend yield. It is a pretty good dividend yield on an absolute basis, significantly higher than that of the S&P 500, and moderately higher than that of international equities and U.S. dividend equities.

VYMI's comparatively strong dividends are due to two factors.

First, the fund invests in international stocks, which tend to have higher yields than U.S. equities. This is partly due to differences in industry weights, with international focusing a bit more heavily on financials, less on tech. This is also partly due to issues of valuations, with international equities generally trading at lower share prices, and hence higher yields.

The second reason the fund's yield is higher than average, is that it focuses on international stocks with above-average yield. Seems obvious, but still important to mention.

VYMI's dividends have seen reasonably good growth in the past, with some volatility.

Due to dividend and share price volatility, yield on costs barely show an upwards trend.

The best dividend ETFs have a much smoother yield on cost curve. For reference, yield on cost for the SCHD Schwab U.S. Dividend Equity ETF ( SCHD ).

Notwithstanding the above, VYMI's dividends seem reasonably good, if not outstanding. Investors looking for the highest yields or strong dividend growth might consider other funds, but VYMI does offer reasonably good dividends, and higher than average for an equity fund.

Performance Analysis

VYMI's performance track-record is below-average, at best. The fund has underperformed the S&P 500 long-term, and for most relevant time periods. VYMI has outperformed broader international equities long-term, and for most relevant time periods. The performance has materially improved since early 2022, however.

VYMI's track-record is easy to explain.

The fund has significantly underperformed the S&P 500 since (relative) international valuations peaked in the aftermath of the financial crisis.

But has performed much better post-pandemic. Returns have been broadly similar to those of the S&P 500, with a lot of volatility depending on the specific time period in question. The fund has somewhat underperformed since mid-2021:

But outperformed since I last discussed the fund in mid-2023 , and prior to that in late 2022 .

Looking at international equities more broadly, JPMorgan ( JPM ) data says these very slightly outperformed U.S. equities between 2022 and 2023, but that the trend has since mostly reversed itself. This was the shortest, shallowest cycle of international outperformance in decades.

In my opinion, VYMI's overall performance track-record is reasonably good. Long-term returns were much weaker in the past, but valuations were much higher too, and both have since improved.

Conclusion

VYMI offers investors a good and growing 4.7% yield, a cheap valuation, and some momentum. The fund is a strong investment opportunity, and a buy.

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