A Five-Minute Review
When I buy an ETF as a major holding, I expect it to have some very specific characteristics. One of those characteristics is a dividend that grows and/or a total return on the investment that is better than average. To that end when I saw the dividend announcement for VYM (Vanguard High Dividend Yield Index) I quickly reviewed some key metrics. The dividend is almost $1.00 per share, but that is not the most important consideration.
Consecutive Years of Dividend Growth
By itself, like most measurements, this also isn’t the only consideration. However, if inflation is a drain on the purchasing power of a dollar, then income must grow. If it doesn’t then you buy fewer eggs or less of something that you typically purchase. I believe a good investment should have a “years of dividend growth” that is better than average. VYM fits the bill.
Dividend Growth Rate TTM Snapshot
The next step is to consider whether the dividend has been growing recently. What it did in the last ten years is not necessarily the only success factor. There is a slowing of growth. The “Trailing Twelve Months” (TTM) value is currently negative. This element may mean it is time to sell some of the VYM shares and buy more shares of DGRO and SCHD.
The Covid Test 2018-2020 and Now 2023-2025
If you depend on income during retirement, you don’t want to see dividend income decreasing. VYM weather Covid-19 nicely. One thing to remember when looking at ETF dividends is that they are not “consistent” for Q1, Q2, Q3, and Q4. Rather, they tend to move up and down each quarter. It is best to view annualized income for that reason. This graph reveals a weakness for 2023, 2024, and 2025. Dividends seem to have plateaued.
Total Returns are Price Plus Dividends
VYM is not the leader of the pack for total ten-year returns. However, at 212%, it is certainly far better than any bond fund and a vast majority of other equity ETFs. Investments like DVY and HDV have questionable dividend growth track records.
ETF Grades Help Visually
There are five components. There is “momentum,” which is the way the price is moving. It should be going up. Expenses are a drain on your investment portfolio. All but DVY have sensible expense ratios. Dividends should be A or better. HDV is weak in this category. “Risk” is relative. However, I like to keep risk to a minimum, so VYM fits my ETF profile. Finally, Liquidity is of concern for buying and selling ETFs. If you want to sell and there aren’t a lot of buyers, you might have to sell at a price that isn’t desirable.
Comparable Dividend Growth and Yields
It never hurts to comparison shop to get a sense of the quality of the ETF. In this image it is clear that HDV once again disappoints. However, DGRO, VIG, and SCHD appear to be more desirable for growth with a bit less dividend growth history.
Concentration and Risk
As a very general rule, having an ETF with a broad mix of investments is better than more focused investments. This can reduce the impact of sudden changes in the value of the total portfolio by spreading the risk across many different investments. VYM comes out as the leader in this category with 606 holdings. HDV fails on several levels: a low number of holdings, a ridiculous focus of assets in the top ten holdings, and turnover of 82%. High turnover is very telling. It generally means that the fund manager cannot or will not buy and hold. I like to see turnover at less than 25%.
10-Year Price Returns Matter for Large Holdings
While total returns are a key to selecting an ETF investment, you don’t want price returns to be flat or negative. If I’m going to commit $100K or more to an investment, I want the price of the shares to increase.
Sector Diversification
I have three favorites when it comes to business sectors. They are Technology, Financials, and Health Care. Over 50% of VYM is allocated to these three sectors. If you buy a fund focused on a sector, then I would encourage you to consider these three sectors.
Top Ten Holdings
As I mentioned earlier, HDV is not an ETF I would buy. VYM, on the other hand, has a top-ten list of very profitable companies. I own shares of Broadcom, Johnson & Johnson, and Abbvie. Note that the top ten are diversified in technology, healthcare and financials.
Our VYM Holdings
Cindie and I currently have 2,285 shares of VYM. The other entries that I blurred are for accounts I manage, like the UTMA accounts for our grandchildren. Our total VYM holdings are worth about $363K, making it one of our top-ten investments. I will be selling some of our shares this year, and will likely buy shares of SCHD.
Conclusion
You should understand what you own. You should also review an investment before you buy it. When events, like dividend announcements appear, it is prudent to revisit your reasons for buying the investment.
There are also historical considerations like: Do your investments weather events like Covid-19? If you want income from your investments, have you selected equities and ETFs that provide growing income? What happened to your investments and income during 2019-2020?
Finally, are your investments truly diversified? Just because you have multiple ETFs does not mean you have good diversification.
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