ETF Talk

Low Bond Yields Open the Door to Dividend Funds

The Vanguard High Dividend Yield ETF (VYM) tracks the common stocks of companies that pay higher-than-average dividends, making it a viable exchange-traded fund (ETF) pick for when market conditions are uncertain.

Two major factors are making dividends a popular investment focus right now. First, with bond yields at historic lows, many investors are turning to dividends as an alternate source of constant income. Second, geopolitical tensions and frustration at the lack of progress on growth initiatives from the Trump administration continue to keep investors in a “wait and see” mentality.

VYM uses a conservative, diversified approach that seeks above-average yields without exposure to excessive risk. This is evident in the fund’s very low 0.01% spread. VYM has a massive $18.82 billion in total assets under management and a very healthy $56.91 million in average daily trading volume.

VYM screens and ranks companies based on the forecast of their dividends over the next 12 months, selecting only those which rank in the top half. The ones that make the cut are then weighted by market capitalization, rather than dividends.

As an additional measure, the fund excludes real estate investment trusts (REITs) because of unfavorable tax rules. As dividend-paying stocks themselves offer some downside protection (since they tend to fare better during corrections and recessions than other equities), investors in VYM may be able to reduce their risk without having to sacrifice extra income in the process.

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