Scalper1 News
Summary VYM offers a solid dividend yield of 3.28% to go with a low expense ratio and a reputable firm backing the fund. The holdings are solid overall, but a few of the top allocations concern me. The sector allocations show that the portfolio changes quite a bit as we get out of the top 10. I love seeing stocks like JNJ and Wal-Mart in a dividend growth portfolio. The Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a great ETF. Investors may quibble on whether the allocations are perfectly or merely good, but there is far more to like than to hold against the fund. Quick Facts The expense ratio is a mere .10%. That is very appealing for the cost conscious long term investor. When it comes to investing, who wants to throw away their capital on high expenses ratios or trading costs? This fund looks like a great long term choice. Holdings Of course simply having a low expense ratio and the name “Vanguard” is not enough to establish a fund as a great investment. Those two aspects are a great starting point, but investors should always look to the holdings in making their decision. I put together the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. Johnson & Johnson (NYSE: JNJ ) is another great dividend company to hold. They have an effective R&D team and a global market presence. Just look at their dividend history and try to come up with a reason that this company shouldn’t be in a dividend growth portfolio: (click to enlarge) All around Telecommunications I’ll admit that allocations to Verizon (NYSE: VZ ) and AT&T (NYSE: T ) are enough to concern me. I have been staunchly opposed to investing in the telecommunications sector since Sprint (NYSE: S ) appointed a new CEO that knew how to wage a war based on pricing. Sprint immediately ditched their terrible marketing plans and started emphasizing price. Since I had switched from Verizon to the Sprint network within the last few years, I was keenly aware of how difficult it was to find any reliable information on price comparisons. The difficulty of getting quality information about pricing was a deliberate plan to avoid price-based competition. When Sprint decided to wage a war on prices, margins across the sector were put in jeopardy. Outside the Top 10 The beauty of this ETF, in my opinion, lies on the entire portfolio more than the simple top 10. The portfolio has large allocations just outside the top 10 to major dividend champions like Altria Group (NYSE: MO ). They also have heavy positions in some of the big players that have recently fallen out of favor such as Wal-Mart (NYSE: WMT ) and McDonald’s (NYSE: MCD ). I love these positions for their ability to stabilize the portfolio if the market turns south. While few investors may think of Wal-Mart as a stabilizing force after their declines over the last year, I think investors are simply showing far too much fear about margin compression. Wal-Mart has been hammered by a fear of higher wages eliminating their already thin operating margins. It is true that those higher wages will slam earnings over the next year or two, but who will stop Wal-Mart from passing on higher prices to customers? Seriously, ask yourself who is going to grab their market share. Is it Target (NYSE: TGT )? Target is also raising wages and has the same incentive to boost prices and protect their operating margins. Target is also in the portfolio and weighted at about .7% of the total value. Sectors The sector composition looks fairly reasonable as well. The positions are highly diversified and I love to see that telecommunications only comes in at 5.3%. I really wouldn’t want any more exposure with the problems I mentioned before. This portfolio is structured in a fairly solid manner with heavy weights on companies that have solid yields and a solid history of maintaining and growing their dividends. What to Add If an investor wants to use VYM as the core of their dividend portfolio, I would look to enhance the utility allocation. The allocations within the ETF are reasonable but investors focused on getting a reliable dividend year after year that grows with inflation would be wise to consider keeping a strong allocation to the utilities. Conclusion VYM has the right name and the right expense ratio. The top 10 holdings are a mixed bag in my eyes because of sector specific concerns. When we look further into the portfolio and examine the sector allocations I find the portfolio becoming more attractive. Currently the ETF is yielding 3.28% and I would expect distributions to increase in most years. For an investor looking to build a simple and solid portfolio that creates reliable income for them to live on, this looks like a great core holding. For investors going through TD Ameritrade, this option excels even more because it is on their “free to trade” list. Scalper1 News
Scalper1 News