VYMI - VYMI: Is A Good Choice With High Dividend Yield And Cheap Valuation

Summary

• In summary, everything is offered that US investors, in particular, should want from a dividend ETF.
• The fee is low, the diversification worldwide, and with over 1,000 companies broadly diversified. In addition, the valuation is cheap.
• The current yield is about 5%, and the growth has been 13% yearly since the ETF's inception in 2016.

Investment Thesis

A few days ago, I wrote about the Global X SuperDividend ETF (SDIV), which yields a whopping 13%. Nevertheless, I concluded that the ETF is risky, and the dividend will likely be reduced. From my point of view, the better choice is the Vanguard International High Dividend Yield ETF ( VYMI ) which is more broadly diversified, cheaper, and focuses not only on the very highest dividend yields but also on quality. The current yield is about 5%, and the growth has been 13% yearly since the ETF's inception in 2016.

ETF Overview

VYMI invests in high-yielding stocks from all over the world (ex-US) and tracks the "FTSE All-World ex US High Dividend Yield Index." The yearly expense ratio is only 0.22% (compared to 0.58% for the Global X SuperDividend ETF). Currently, the ETF contains 1302 stocks (according to Vanguard - you can see the complete list here ), with the top ten representing 14%; these are:

• The top sector in the ETF is Financials with 36%, followed by Energy at 10%, Basic Materials at 10%, and Industrials at 9%.

• The top countries are the UK with 30%, Japan with 13%, Australia with 9%, Canada with 8%, and Switzerland with 7%. Global diversification is a given and is particularly interesting for investors currently overweighted in American equities and would like to diversify more broadly, which is always recommended from a risk perspective.

Valuation & Europe's risk

High dividend yields occur when valuations are low on a P/E basis. The average P/E ratio of the stocks in the ETF is 8.8, less than half of the S&P 500. There are many reasons for this; one is the current war in Europe. The market started to price in increased risks last year, and there was also a massive outflow of money from Europe to US stocks. But Europe, contrary to worse fears, has proved more resilient and has come through the winter without a lack of energy or power blackouts. This is quite an achievement, given that within a few months, there has been a complete shift away from the most significant supplier of oil and gas.

Nevertheless, European companies are currently at a structural disadvantage compared to their competitors in the USA and Asia. There is enough energy, but it is expensive. Therefore, it is not clear how the competitiveness of companies will develop in the coming years. However, many European companies are already active worldwide and do not only produce in Europe. There is also the possibility of relocation. Sometimes companies are from the UK or Germany on paper, but make the greater part of their products and revenue on other continents.

And even if Europe loses market shares and companies to Asia, with an ETF investment, one has invested on both continents anyway. In the long run, the ETF would then increase the weighting of the emerging markets and lower Europe's due to the market capitalization weighting. However, the high weighting of Europe also has an advantage. If the dangerous current geopolitical situation in Europe eases again, this could lead to more relaxation among investors, and the currently very low valuation of European companies could rise again. Because, as I said, the average P/E ratio of the ETF is 8.8.

Earnings growth & Dividend growth

According to Vanguard, the average annual growth rate in earnings over the past five years is 8.3%. The earnings growth is surprisingly strong, especially considering that the top sector in the ETF is financials. Also, dividend-focused ETFs generally include more established value than growth companies. As for dividend growth, it has increased by an average of 13% per year since the ETF's inception in 2016. One of my criticisms of the competitor, the Global X Super Dividend ETF, was that the dividend has been falling for years. But a rising dividend means the companies have rising profits, which is a sign of quality.

In a historical comparison, now is a relatively good time to buy. Recently there was even a 6% dividend yield, but buying at the perfect time is unfortunately difficult. Overall, we can see that the dividend yield is higher than in the pre-pandemic period. From this, we can conclude that the average P/E valuation of the stock at that time was significantly higher than 8.8.

Performance

This drop in the average P/E ratio can also be seen quite well in the performance. The significant discrepancy compared to the S&P500 was not there in the last year but mainly from 2018 to 2020. Therefore, from today's perspective, if you look at the historical performance, it looks terrible. Still, at the same time, the ETF is a better buy today than in 2018, as it is more cheaply valued, and the initial dividend yield is almost twice as high.

For who is the ETF suitable, and for who not?

Over an extended period, dividend ETFs tend to perform worse than broader ETFs. But on the other hand, dividend ETFs have lower volatility. So for whom the ETF is suitable is similar to the case of value versus growth: it depends on your age and risk tolerance. And in this case, it also depends on your US exposure and whether you consider it too high and want to diversify. Even in an MSCI World, the US exposure of about 60% is too high for my taste. But of course, everyone has to decide that for themselves.

I own and regularly invest in a very similar ETF. Unfortunately, this one from Vanguard is not tradable in Europe, so I always have to switch to ETFs permitted in Europe. However, I like dividend ETFs as far as Emerging Markets are concerned. The yields are high, and the dividend growth is fast. Sometimes, emerging markets can feel a bit shady because I don't know most of the companies. Some are registered in Bermuda and can only be traded as ADRs, so several unpleasant conditions exist. But if you get increasing dividends every year, then you know that the companies can't be fake but earn money and give something back to investors.

Risks

In my view, the main risk with this ETF is geopolitical. If the conflict in Ukraine continues to escalate unexpectedly and spreads to other countries, the flight of capital from Europe will probably accelerate. I'm not talking about a third world war because that would affect every investment and every person worldwide anyway, but about the conflict spilling over to neighboring countries such as Moldova without turning into a world war.

ETF-specific risks lie in the portfolio composition, as the concentration of 37% of financials is very high. The concentration on the UK is also high at 30%. If this is too much of a cluster risk for you, you should switch to other ETFs or buy more different ones. For example, one only for emerging markets and another only for Europe, and then you can weigh them as you wish. That's exactly how I handle my ETF investments.

Conclusion

In summary, everything is offered that US investors, in particular, should want from a dividend ETF. The fee is low, the diversification worldwide, and with over 1,000 companies broadly diversified. The top positions, however, consist of well-known value companies. In addition, the current valuation is cheap, and thus the dividend yield is high.

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