Not Everyone Agrees
Seeking Alpha Cory Cramer wrote a piece published on December 2nd titled, “Which ETF May Disappoint Retirees The Most, SCHD Or VYM?” One of the sections in the article has the heading, “Reviewing Why SCHD Is Not Good For Retirement Right Now.” I own shares of SCHD and have no plans to sell. In the same article Cory has a section he titled “Why VYM is not a good investment for retirement.” You will note there is a slight difference in his view of these two investments just by reading the headings. SCHD is not good “right now”, but VYM is “not a good investment.” This doesn’t dissuade me from continuing to make VYM my number one investment in total dollars invested.
Cory rates VYM as a sell. While he makes some valid points, I believe his analysis is based on the short-term rather than long-term thinking. I want to buy ETFs that have a history of dividend growth, safety for down markets, with good diversification in both value and growth companies across many different business sectors. I want a low expense ratio and reasonable ten-year returns. In the case of VYM, the ten-year price returns are 81.27%. VYM’s total returns since 2007, including dividends reinvested, are 184%. Therefore, in 17 years, which is a long-term perspective, this fund has performed reasonably well.
There are nine Seeking Alpha authors who have rated VYM. Three of them rate VYM as a “BUY”, four say “HOLD”, and two recommend “SELL.” The question always is, “Who can you believe?” The answer depends on your strategy. If you are looking to time the market and trade in and out of positions, then VYM is not for you. If you want yield as your primary qualification for an investment, then VYM is not for you.
One Problem With VYM is Yield
One of the problems is a matter of comparison. If you look at the typical yield on FDIC-insured CDs, you can easily find CDs that will pay at least 5%. VYM has a yield of just slightly over 3%. Think back in time. CDs may not yield 5% if the Federal Reserve cuts interest rates. If what you want is “safe” yield today, then VYM is not for you. You would do best to buy CDs. But what will interest rates be in twelve months? Will you be able to switch to dividend growth when yields fall?
In fairness, I do have short-term CDs in three of our Fidelity accounts. But these are for cash that is set aside as an emergency fund or as the source of cash for 2024’s RMDs. None of the CDs has a duration longer than six months.
VYM’s Seventeen-year Dividend Track Record
VYM has hit some rough patches during difficult times. From 2008-2010 dividends were headed down. For the last thirteen years, however, the trend has been up. Especially noteworthy is what happened in the Covid scare of 2019-2020. VYM’s dividends continued to climb. However, there were more investors selling VYM than buying shares, so the price per share in 2020 dropped significantly. Should that happen again, I would buy more shares.
VYM’s Top Ten Holdings Are Solid
VYM’s top ten investments, which make up almost 25% of the total investments in VYM, are JPMorgan Chase & Co, Exxon Mobil Corp, Broadcom Inc, Johnson & Johnson, Procter & Gamble Co, The Home Depot Inc, Merck & Co Inc, AbbVie Inc, Chevron Corp, and PepsiCo Inc. These are all quality investments spread across multiple sectors. VYM has investments in 453 different companies, making it very diversified.
Note that Microsoft, Amazon, Tesla, Google, Meta, and Apple are not in the top ten. If you want to have those investments, then buy an ETF like SPY. But also be aware that 30% of your investment dollars are in SPY’s top ten and that SPY has a heavy weighting on the technology sector.
Far too often, for many ETFs, the top ten are a list of “me too” stocks like Amazon, Facebook, Tesla, Google, and Microsoft. There is a place for those in your portfolio, but far too many funds hold far too much of these big five in their top ten. It is important to note that none of the top ten are more than 3.4% of the total investment. If you buy shares of an S&P 500 index fund, the top two investments (Apple and Microsoft) make up 14% of the total investment dollar. (SPY SPDR® S&P 500 ETF Trust.)
Full Disclosure
Cindie and I own 2,730 shares of VYM as a long-term investment. As a result, it is in the top ten investments we hold. This is not a recommendation for you to buy VYM. However, I do like the fact that our next dividend from Vanguard for our VYM shares will be $3,002. If you look at the following illustration, our 2,730 shares provide more cash for buying power and charitable giving. This only illustrates the last three years, but you can see how the growth, comparing quarter-to-quarter, and year-to-year, is increasing our income.
Know Your Flocks & Herds 