Key Points
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The Vanguard High Dividend Yield ETF is one of the most popular dividend ETFs in the marketplace.
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Its lax selection strategy means the fund owns more than 600 stocks and yields a modest 2.3% currently.
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That means investors will need to buy a sizeable amount of shares to generate $500 per month.
High-yield dividend exchange-traded funds (ETFs) are great for anyone looking to improve the income generated by their portfolios. But these funds come in all shapes and sizes. You really need to look at how the fund is constructed to understand whether it’s right for you.
The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) takes a rather generic approach. It starts with a wide universe of dividend-paying stocks and simply selects the top 50% of forward-looking yields for inclusion. What you end up with is a portfolio of more than 600 stocks with a relatively modest 2.3% yield.
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That’s double the yield of the S&P 500 (SNPINDEX: ^GSPC), but it’s well below the 3%-4% yields currently being offered by many other ETFs in this category.
The 2.3% yield makes it challenging to generate a lot of income from the Vanguard High Dividend Yield ETF. To achieve an income of even $500 per month (assuming a steady 2.3% yield going forward), someone would need to have nearly $261,000 invested in the fund. That’s more than is needed with funds such as the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). An investment of roughly $187,000 in SCHD, with its 3.2% yield, would generate $500 monthly.
The Vanguard High Dividend Yield ETF has yielded 3% at several points in the past, so it’s possible that income prospects will improve in the future. But the fund is still a relatively conservative entry in the high-yield space and one that is very popular with investors.
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David Dierking has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
