2023-07-25 12:15:40 ET
Summary
- I discuss the benefits of investing in high-dividend funds, using Vanguard's High Dividend Yield Index Fund ETF as an example.
- The fund holds 462 stocks that pay high dividends, with a current 30-day SEC yield of 3.2%, higher than Vanguard's S&P 500 ETF yield of 1.49%.
- However, there are other high-dividend funds with better total returns, such as Schwab's US Dividend Equity ETF.
I like dividends! I like the idea of having companies I own sending funds to my brokerage account or retirement account every quarter or every month. Warren Buffett has said that if you can't find a way to make money while you sleep, you'll work until you die. That's true, whether it be a pension, Social Security, or personal investments that's providing the money you get in your sleep. The more dividend income I get, the more excited I get about investing.
That would make it seem as though investing in a high-dividend fund would be a great option for income-focused investors. I've invested in Vanguard's High Dividend Yield Index Fund ETF ( VYM ) in the past, and I'd recently thought about investing in it again. However, upon looking at recent returns, I'm not sure it's a great investment at this point, even though I want to increase my dividend income over time.
VYM Income Vs. VOO
Vanguard's high dividend ETF has the intent of bringing higher-than-average income to investors (at least when compared to the broader market). What investors choose to do with their dividends after they receive them is up to the individual investor. Those who are still working might opt to reinvest all of the income. On the other hand, people who are retired might need some or all of the dividend income to pay some bills. The money they earn while they sleep can help them make ends meet after they stop working.
VYM currently holds 462 stocks that pay "high dividend yields." Of course, what constitutes a high dividend yield might vary. This fund tends to have lower investments in tech stocks, opting more for financials and utilities, in other words, older companies that pay relatively high dividends.
A look at the portfolio breakdown shows that REITs do not make up even a small slice of VYM, which limits some of the dividend income (although other types of investments with qualified dividends are more tax efficient).
The current 30-day SEC yield, according to the fund's home page is 3.2%. That is higher than the current yield on V anguard's S&P 500 ETF ( VOO ), which is currently at 1.49%. The income is obviously higher with VYM. Over the past five years, the dividend has increased, on average, by just north of 6% per year. This would mean the dividend should double approximately every 12 years. A look at the dividend history, shows that it has basically doubled between 2012 and 2022, going from $1.59 per share to $3.25 per share annually over that time.
When comparing the dividend history with VOO, the dividend growth is actually higher for the broader index fund, which is to be expected. Newer companies that are growing will frequently grow their dividends more rapidly because they start at a lower yield. Some tech companies fit this description. Unlike VYM, VOO had a decline in dividend income during 2020, when many companies cut or suspended their dividends as a result of the COVID pandemic and the economic disruptions it caused. Nevertheless, the dividend between 2012 and 2022 grew from $2.83 per share to $5.94, which is a higher growth rate than that experienced by VYM.
Both have shown growth in dividend income, although VOO exceeds VMY when it comes to the compounded annual growth rate.
Total Returns
Many people who invest in stocks do so for price appreciation. Even though I own some companies that have higher dividend yields, I still want to see some price appreciation on my investments.
VYM has shown some price appreciation. Over the past ten years, each share has increased in value by 85.62%, which is an annual rate of 6.44%. When adding the dividend yield which has roughly averaged between 2.8% and 3.1% over the past ten years, depending upon the year (with the exception of 2020, which was an anomaly), and you'll come up with a total return of roughly 9-9.5%. This is not bad, and investors would see their money double roughly every seven to eight years. That's not bad, but VOO again beats VYM.
VOO has grown by a cumulative 166.43% in price appreciation over the past decade. This is a CAGR of roughly 10.3%. When adding the average dividend yield that's ranged from 1.36% to 2.06% (1.8% seems to be about the average), the total average return is right around 12%. Therefore, investors in VOO would see their money double in about six years. For both funds, this assumes that the investors would reinvest their dividends. Again, VOO beats VYM.
Conclusion
Those looking for cash can get some solid income from VYM. Although the growth in dividend income is slightly slower than that experienced by VOO, the high-dividend option comes with a higher starting yield, so the dividend income will likely continue to be much higher over time. However, those looking for total returns would have done better with an investment in the S&P 500 without concern for dividends. For those willing to sell some shares to harvest growth, there will likely be more money available overall with the broader market index fund. Dividend payments would provide some of the money in either scenario. It would just make up a bigger proportion of the income with VYM.
There are also some high-dividend funds that have a better total return than VYM. For example, Schwab's US Dividend Equity ETF ( SCHD ) has a CAGR of 8% over the past ten years, and its dividend is also higher than VYM's. Whether you're looking for a relatively high yield or a high total return, there appear to be better options out there.
For further details see:
VYM: Higher Income, But Lower Returns