Exchange-traded funds (ETFs) make investing money to grow your wealth very simple. They require virtually no effort on your part because they are professionally managed investment vehicles. Furthermore, most ETFs hold a diversified portfolio of stocks, which allows you to keep things really simple by investing in fewer funds to gain the market exposure you want.
The Vanguard High Dividend Yield ETF (VYM 0.90%) is a great fund for those seeking a lower-risk way to steadily grow their wealth. That’s because dividend stocks — this fund’s particular focus — have historically produced higher total returns than non-dividend payers with less volatility.
A wealth-creating fund
Vanguard High Dividend Yield ETF has been a steady wealth creator throughout its history:
|
Fund |
1-Year |
3-Year |
5-Year |
10-Year |
Since inception (11/10/06) |
|---|---|---|---|---|---|
|
Vanguard High Dividend Yield ETF |
30.10% |
11.75% |
11.44% |
10.17% |
8.94% |
Data source: Vanguard.
As that table shows, the fund has delivered a solid return over the years. Its return has been higher in recent years due largely to a strong stock market. However, its return since inception aligns with the long-term average of dividend stocks. For example, the average dividend stock in the S&P 500 has delivered a 9.2% annualized total return since 1973, according to data from Ned Davis Research and Hartford Funds.
That rate of return can really add up over the years. For example, if you invested $250 into this fund each month, and it continued to deliver an average annualized total return of 8.9%, your investment would grow to more than $260,400 in 25 years. If the fund’s returns are higher (as has been the case in more recent years), your $250-a-month investment could grow even bigger. For example, a 10.2% average annual return would grow your investment to $318,000 in a quarter century.
A closer look at this fund
Vanguard High Dividend ETF has a very simple strategy. It invests in stocks with above-average dividend yields. The fund currently has an income yield of 2.5%, which is more than double the dividend yield of the S&P 500. That higher dividend yield provides fund investors with a higher base return. Investors could eventually use the passive dividend income the fund produces to help cover a portion of their living expenses in retirement while allowing their principal to continue growing.
That income stream has historically risen at a relatively steady pace:
VYM Dividend data by YCharts.
That’s because many of the fund’s holdings have excellent track records of increasing their dividends. Here’s a snapshot of its five largest holdings:
|
Company |
Weighting in the fund |
Dividend yield |
Dividend growth history |
|---|---|---|---|
|
Broadcom |
4.4% |
1.2% |
13 years of consecutive increases. |
|
JP Morgan Chase |
3.6% |
2% |
14 years of consecutive increases. |
|
ExxonMobil |
3% |
3.5% |
42 years of consecutive increases. |
|
Home Depot |
2.2% |
2.2% |
15 years of consecutive increases. |
|
Procter & Gamble |
2.2% |
2.4% |
52 years of consecutive increases. |
Source: Vanguard.
As that table showcases, the fund’s top holdings have each delivered more than a decade of dividend growth. They also currently pay dividends at or above the S&P 500’s level. Those are just five of the more than 500 stocks held by the fund. Overall, the fund holds a very diversified portfolio of stocks by sector:
- Financials: 21.8% of the fund’s holdings.
- Industrials: 12.7%.
- Healthcare: 11.7%.
- Consumer staples: 10.8%.
- Consumer discretionary: 10.1%.
- Technology: 9.8%.
- Energy: 9.6%.
- Utilities: 7.2%.
- Telecommunications: 4.3%.
- Basic materials: 2%.
That diversification helps reduce risk. It also makes the fund a great core investment because it provides an investor with fairly broad market exposure.
A high-quality ETF
The Vanguard High Dividend Yield ETF is a great long-term investment option. It focuses on high-yielding dividend stocks, which have historically produced solid returns with less volatility. Because of this, the fund should help investors slowly grow their wealth in the coming decades.
JPMorgan Chase is an advertising partner of Motley Fool Money. Matt DiLallo has positions in Broadcom, Home Depot, and JPMorgan Chase. The Motley Fool has positions in and recommends Home Depot, JPMorgan Chase, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
