Is Vanguard High Yield Dividend Index Fund Stock A Buy? Growth investors and income investors look at the market differently. Growth investors are focused on a “buy low, sell high” strategy, so they choose stocks that have the potential to be the next Amazon, Apple, or Alphabet.
Income investors have an alternative approach. Yes, they still hope to see stock prices go up. However, they are far more interested in amassing a collection of stocks that pay dividends year after year.
Building a mix of high-dividend stocks requires time-consuming research – especially if the portfolio is going to be appropriately optimized from a diversification perspective. Those who lack the time and interest necessary to develop a low-risk, high-return portfolio often choose to let the experts do the research. Instead of individual stocks, they buy shares of mutual funds or exchange-traded funds (ETFs).
Both of these products are professionally managed, so there are expenses associated with participation. However, when expenses are low, the benefits outweigh the cost. A single share of either type of fund offers exposure to a variety of companies – something that is often not possible for the average investor.
Income investors can enjoy the advantage of owning stocks that pay high dividends with a fund that tracks the FTSE High Dividend Yield Index. One of the most reputable is Vanguard’s High Yield Dividend Index Fund (VHYAX). For those who prefer ETFs, VHYAX has a sister fund – the Vanguard High Dividend Yield ETF (VYM).
What Is The FTSE High Dividend Yield Index?
The Financial Times Stock Exchange Group (FTSE) is a financial company based in the United Kingdom.
It has an indexing division similar to Standard & Poor (S&P) that is responsible for developing a variety of index offerings. Indexes track hypothetical stock portfolios that meet various goals and are used as benchmarks throughout global financial markets to measure the performance of particular market segments.
The best-known FTSE indexes include the FTSE 100 and the Russell 2000. However, there are dozens of others that measure performance in specific sectors, industries, and geographies. For example, there are environmental market indexes dedicated to sustainable investment and indexes that track growth in emerging markets.
The FTSE High Dividend Yield Index follows stocks with higher-than-average dividend yields. It uses a forecast dividend yield ranking process to determine which companies are included.
The Vanguard High Dividend Yield Index Fund and the Vanguard High Dividend Yield ETF are designed to mirror the returns of the FTSE High Dividend Yield Index.
Is Vanguard High Yield Dividend Index Fund Stock A Buy?
Growth stocks have struggled in 2022. The combination of high inflation, rising interest rates, and global political tension has prompted investors to retreat from high-risk assets. Instead, they are filling portfolios with safer alternatives that can weather a bear market with minor damage. Examples of recession-proof industries include energy, healthcare, and consumer staples.
Stocks that consistently pay higher-than-average dividends fall into the lower-risk category because they are likely to deliver returns even if share prices fluctuate. Investors who want broad exposure to high-yield dividend stocks can choose the Vanguard High Dividend Yield Index Fund to get a diverse mix of securities in every share.
Vanguard High Dividend Yield Index Fund Sectors
VHYAX holds assets across multiple sectors, with the most considerable portion in financial services. As of October 31, 2022, the breakdown is as follows:
Financials – 20.20 percent
Health Care – 15.20 percent
Consumer Staples – 12.75 percent
Energy – 11.17 percent
Industrials – 10.37 percent
Consumer Discretionary – 8.58 percent
Utilities – 7.57 percent
Technology – 5.92 percent
Telecommunications – 4.57 percent
Basic Materials – 3.66 percent
These percentages are a near-identical match to the benchmark index.
Vanguard High Dividend Yield Index Fund Holdings
As of October 31, 2022, the fund owned 442 stocks. The top ten holdings include:
Exxon Mobil Corp. (XOM) – 3.31 percent (Integrated Oil & Gas)
Johnson & Johnson (JNJ) – 3.28 percent (Pharmaceuticals)
JPMorgan Chase & Co. (JPM) – 2.63 percent (Diversified Banks)
Chevron Corp. (CVX) – 2.54 percent (Integrated Oil & Gas)
Procter & Gamble Co. (PG) – 2.30 percent (Household Products)
Home Depot Inc. (HD) – 2.19 percent (Home Improvement Retail)
Eli Lilly & Co. (LLY) – 2.18 percent (Pharmaceuticals)
Pfizer Inc. (PFE) – 1.88 percent (Pharmaceuticals)
AbbVie Inc. (ABBV) – 1.85 percent (Biotechnology)
Merck & Co. Inc. (MRK) – 1.83 percent (Pharmaceuticals)
All of these are well-established US-based companies, and most of the total portfolio consists of similarly large organizations. In terms of the market cap of companies included in the fund, the portfolio breaks down like this:
Large – 77.1 percent
Medium/Large – 3.1 percent
Medium – 11.7 percent
Medium/Small – 4.6 percent
Small – 3.5 percent
Again, this is essentially a match to the benchmark index.
Vanguard High Dividend Yield Index Fund Fees, Expense Ratios, And Key Facts
The primary pitfall of funds over individual securities is the fees and expenses associated with these shares. Fortunately, index funds tend to be passively managed, which keeps costs down. VHYAX has no purchase fees, no redemption fees, and no minimum required investment.
The expense ratio is relatively low at 0.08 percent as of February 25, 2022.
Other key facts about the fund include the following:
Total Net Assets – $64.9 billion
Inception Date – 02/07/2019
Year-to-Date Returns – 3.02 percent (as of December 2, 2022)
1-Year Returns – 10.18 percent
3-Year Returns – 10.71 percent
Returns Since Inception – 11.93 percent
Since the fund launched, returns are 0.06 percent lower than the underlying index. Dividends are distributed quarterly.
The Vanguard High Dividend Yield Index Fund includes stocks from US companies but excludes real estate investment trusts (REITs). There are several reasons for leaving REITs out of the fund’s portfolio.
The biggest is that REIT dividends don’t usually get the favorable tax rates that apply to qualified dividends.
Overall, this fund is a smart buy for investors who wish to increase dividend returns and keep portfolios stable during volatile economic times.
Best Dividend Index Funds
Vanguard isn’t the only firm with a successful high-yield dividend fund. Other high dividend yield funds worth considering include:
In some cases, these funds don’t track an index. Instead, they are actively managed, which typically means higher expenses for shareholders.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.