The Vanguard High Dividend Yield Index Fund ETF (VYM 0.75%) and the Vanguard International High Dividend Yield Index Fund ETF (VYMI 0.79%) are two of Vanguard's most popular dividend-focused exchange-traded funds (ETFs).
These funds offer investors a way to gain exposure to a broad array of high-dividend-yielding stocks, which can be a valuable component of a diversified investment portfolio. Here's a closer look at what makes these funds attractive for long-term investors who value capital appreciation, regular income, or a combination of these features.
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Vanguard High Dividend Yield Index Fund ETF
The Vanguard High Dividend Yield Index Fund ETF, commonly known as VYM, is a popular investment vehicle for those seeking exposure to high-dividend-yielding stocks within the U.S. equity market. Launched in 2006, the VYM aims to replicate the performance of the FTSE High Dividend Yield Index, composed of companies with a track record of high dividend yields.
The allure of VYM lies in its yield, which stands at an impressive 2.82%, surpassing the average yield among large-cap stocks (2.2% average) and the S&P 500 index (1.35%). This fact makes it an attractive option for income-seeking investors.
The fund's average annual return on capital of 8.53% since inception further bolsters its appeal. However, it's important to note that it has lagged behind the S&P 500 in terms of total return on capital over this period.
VYM Total Return Level data by YCharts
The fund's underperformance relative to this benchmark index can be attributed to the exceptional performance of certain mega-cap U.S. companies, rather than a deficiency in the fund's stock selection criteria.
One of the VYM's most compelling features is its low expense ratio of 0.06%, making it a cost-effective choice for investors. In addition, with holdings in 557 stocks across various economic sectors, the fund offers a diversified portfolio, reducing the risk of investing in individual stocks.
Vanguard International High Dividend Yield Index Fund ETF
The Vanguard International High Dividend Yield Index Fund ETF (VYMI) is a compelling option for investors looking to diversify their portfolio with high-dividend-yielding stocks from markets outside the United States. The VYMI aims to mirror the performance of the FTSE All-World ex US High Dividend Yield Index, composed of many international equities with high dividend yields.
One of the most attractive features of the VYMI is its yield. With a dividend yield of approximately 4.87%, it significantly exceeds the average yield among large-cap stocks globally, and the average yield of the S&P 500. This makes the VYMI an enticing choice for income-seeking investors.
Since its launch in 2016, the VYMI has provided an average annual return of 8.31%, marking it as a robust vehicle for those looking to expand their dividend income streams across international borders.
Although it has not outperformed the benchmark S&P 500 index since inception, the VYMI's extensive portfolio of 1526 stocks offers a level of diversification that is hard to match. This greater level of diversification can provide downside protection from marketwide fluctuations and unexpected macroeconomic hiccups.
The fund's expense ratio of 0.22% is slightly above that of its domestic counterpart, the VYM, yet it remains well below the average expense ratio of 0.98% for comparable funds. This positions the VYMI as a cost-effective option for income investors.
Final thoughts
Investing in dividend-focused ETFs like VYM and VYMI can be a winning move for investors aiming to build wealth over time. Dividends can provide a reliable source of passive income, which can be especially valuable during market downturns when capital gains may be harder to come by.
Moreover, reinvesting dividends can compound returns over the long term, potentially leading to significant growth in investment value. These two Vanguard funds should thus appeal to investors who want to take advantage of the power of compounding and have a long-term outlook firmly in mind.
