Top Dividend ETF for Passive Income Investors: A Must-Buy

Top Dividend ETF for Passive Income Investors: A Must-Buy

Investors have good reasons to love dividend stocks. They provide truly passive income because you just hold them in your wallet and then watch the dividend checks roll in.

Choose to have these payments automatically reinvested and you can amplify your returns by collecting more shares which will then generate ever-increasing income. Repeat this process over several decades and you give yourself a great chance of generating an impressive income stream.

Still, picking individual dividend stocks can be difficult, and owning shares of just a few companies can put you at higher risk if one or more of them experience big declines. That’s why many income-seeking investors prefer an exchange-traded fund (ETF) that targets dividend-paying stocks. You can get passive income and broad diversification with a single purchase.

An excellent example is the Vanguard High Dividend Yield ETF (NYSEMKT:VYM).

Why it works

The fund has some of the most profitable large-cap stocks on the market – 451 in total – which makes it stand out from other popular index funds like Vanguard Total Stock Market ETFs. A high dividend is one of its main criteria, which makes its sector weighting very different from other types of funds.

Yield targeting means that the Vanguard High Dividend Yield ETF considers the financial sector as its main sector of activity with 21.8% of the fund’s holdings, followed by industrial products (12.4%) and then goods. basic consumption (11.9%). The technology industry (9.3%) is much less represented in this ETF than in other popular funds.

This is good news for investors who are already exposed to the “Magnificent Seven” stocks that dominate many other index funds.

You will also get excellent income from day one. The Vanguard High Dividend Yield ETF pays 3.0% per year, more than double the 1.4% yield you’d get from a S&P500 index fund. So invest $5,000 in the ETF, for example, and you can expect $150 per year in passive income.

Costs and strategy

As is often the case with Vanguard ETFs, this one is available at an extremely reasonable price. Because it is a passive fund designed to track the FTSE High Dividend Yield Index, it avoids the expense of having a well-paid portfolio manager make decisions about what to buy or sell. The ETF has a low expense ratio of 0.06%, while other dividend ETFs can charge fees of 0.5% or more, eroding your long-term returns.

However, there are still risks to keep in mind. Most important is the fact that the Vanguard High Dividend Yield ETF is focused on technology growth stocks and established companies in mature industries. This means the fund will tend to underperform during rallies like the one investors have experienced over the past year. The ETF delivered a total return of just 6.6% in 2023 compared to 26.3% for the S&P 500.

On the other hand, it tends to outperform during downturns like the 2022 bear market. That year, the S&P 500’s total return fell 18.1%, while the Vanguard High Dividend Yield ETF ended the year flat. Consider it a more defensive option that offers income and stability.

It might be better suited to a portfolio with a few high-growth stocks or a portfolio with exposure to a growth ETF like Vanguard Growth ETF. Having these two funds on your side can ensure you get the best combination of capital appreciation and dividend income.

Should you invest $1,000 in Vanguard Whitehall Funds – Vanguard High Dividend Yield ETF right now?

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Demitri Kalogeropoulos has positions in Vanguard index funds – Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard Index Funds – Vanguard Growth ETF, Vanguard Index Funds – Vanguard Total Stock Market ETF, and Vanguard Whitehall Funds – Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.

1 High Yield Dividend ETF to Buy Now for Passive Income was originally published by The Motley Fool

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