Forget Dividend Growth Investing: I Want My Dividends And I Want Them Now

By | December 1, 2015

Scalper1 News

Summary In a previous article, I featured the Vanguard Dividend Appreciation ETF, and my reasons for including it in my personal portfolio. In this article, I feature a different ETF, one that you may select if you wish to receive a higher level of current income. In the course of this article, I will also examine the question: “Should I perhaps hold both in my portfolio?” Towards the end, I also offer a link that will give you a peek into my own portfolio. This article is designed to be read in conjunction with the most popular article I have managed to write to-date for Seeking Alpha, with over 7,750 web and mobile views and counting. In that article, I featured the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ). I explained why, after considering attempting to build a little 10-stock “mini ETF” of my own, I decided instead to add to my weighting in that particular ETF. While noting that VIG carried a rather modest SEC yield of 2.19%, I featured the structural reasons that one could expect this dividend to grow over time. But what if you are an investor who says: “Forget dividend growth! I want my dividends and I want them now!” As it happens, I have just the ETF for you. This article will discuss another Vanguard ETF that forms a piece of the “bedrock” of dividend income that supports my portfolio; namely the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). When I say “read in conjunction with,” what I mean is that I will attempt not to bore the reader by repeating the information and concepts developed in that previous article, but rather expand on them, clarify similarities and differences between the two ETFs, and ultimately attempt to address the question: “Why might I want to have both ETFs in my portfolio?” Expense Ratio and Composition While, at times, other ETF providers make a wonderful marketing splash by being able, for example, to at least temporarily tout that they offer the world’s cheapest ETF , one of the things I admire about Vanguard is that it offers a wide variety of ETFs – including some that are specialized – at extremely low expense ratios. VYM is no exception. Like its stablemate VIG, its expense ratio is a mere .10%. In this case, what do you get for your .10%? Here’s a quick overview from VYM’s fact sheet on the Vanguard website: Right off the bat, then, we see that VYM tracks the FTSE High Dividend Yield Index and does so in passive fashion, using a full-replication approach. As it turns out, this index represents the U.S.-only component of the FTSE All-World High Dividend Yield Index . From the linked fact sheet, we find that: This index comprises stocks that are characterized by higher-than-average dividend yields. REITs are removed from this index, because they do not generally benefit from currently favorable tax rates on qualified dividends. Additionally, stocks forecast to pay a zero dividend over the next 12 months are also removed. Finally, the remaining stocks are ranked by annual dividend yield and included in the index until the cumulative market cap reaches 50% of the total market cap of the universe of stocks under consideration. The index is reviewed semi-annually, in March and September. Finally, the associated Vanguard Advisor’s page reveals that “buffer zones” are utilized during the annual rebalancing exercise, to reduce portfolio turnover. This index is a little broader than the one utilized for VIG. Currently, VIG contains 179 stocks, and VYM contains 435. The fund currently has $15.6 billion in Assets Under Management (AUM), with daily average trading of $43.41 million. It has an average trading spread of 0.02%. Finally, the fund’s current SEC yield is 3.14%. Comparing VYM With VIG. Should You Hold One? Both? In this section, I will expose the differences and similarities between VYM and VIG. Ultimately, it is my hope that it helps you to decide whether you would like to add one or the other to your portfolio or, like I do, maintain a target weighting in both. To help you conceptualize the differences, I first used the charting capabilities of Excel to visually display the differences in their sector breakdowns, with all percentages being taken directly from the Vanguard fact sheets. From that graphic, you likely noticed that VIG is much more heavily weighted in: Consumer Goods Consumer Services Industrials In contrast, VYM tends to feature: Financials Oil & Gas Telecommunications Utilities When it comes to Basic Materials, Healthcare, and Technology, the weightings are very similar. Next, have a look at the comparative Top-10 holdings of the two ETFs, to see how these themes play out in their largest holdings: There are perhaps two intuitive takeaways from this: VYM tends to feature what might be described as slightly “stodgier” companies. These are certainly not rapid growers. Rather they are established companies in low-growth businesses which deliver a large part of their earnings to shareholders in the form of dividends. VIG tends to feature companies with lower current payouts, but slightly faster growth. If you decide to include both in your portfolio, there is some overlap (3 similarly-weighted sectors, 3 stocks in the Top-10 holdings of both). However, it could be argued that there is a greater level of variance (3-4 sectors with very different exposure, 7 stocks which are not found in both Top-10 holdings). Let’s next turn to relative performance. In reviewing the comments from other Seeking Alpha articles, I have noticed some skepticism regarding dividend-paying stocks, and therefore related ETFs, on two fronts: In good times, they tend to underperform the S&P 500. Conversely, they often don’t hold up so well when the market experiences a sharp downturn. In that vein, you may find the following charts helpful to review. First, I started by laying both VIG and VYM against the S&P 500 index over the past 5 years. VYM data by YCharts Interestingly, I actually find VYM’s performance to be rather stunning. Though it has trailed the S&P 500 by roughly 6% over that time frame, as the next chart shows it has also consistently delivered a dividend in the range of 2.75-3.25%. In contrast, on both counts, VIG’s comparative performance over this period appears slightly underwhelming. VYM Dividend Yield (TTM) data by YCharts Next, though, let’s have a look at the last extended major downturn, covering the period between 10/1/2007 and the bottom on 3/9/2009: VYM data by YCharts In this drastic negative environment, VIG emerged as the clear winner, besting the S&P 500 by a full 8.5% and VYM by over 10%. However, again using the S&P 500 as our benchmark, VYM also held up comparatively well. Summary and Conclusion I am of the belief that dividends are an invaluable component of a solid, well-balanced portfolio. In my case, I have elected to maintain modest holdings in both AT&T (NYSE: T ) and Verizon (NYSE: VZ ) in my personal portfolio for the express purpose of having a solid foundation of dividends. The linked article also explains my rationale for not automatically reinvesting my dividends, and what I do instead. That is why VYM forms an integral part of my portfolio as well. Currently, it stands at 5.18%, augmenting my 7.22% weighting in VIG, for a total of 12.40% between the two ETFs. Should you hold both VYM and VIG in your portfolio? If you are interested in a steady stream of dividends while at the same time benefiting from both great diversification and a low expense ratio, I believe the above evidence suggests that you should. VYM offers a higher current dividend yield while VIG may offer both a little more growth as well as better protection in the event of a market downturn. As always, whatever your personal choices, I wish you. Happy investing! Scalper1 News

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