Passive income is one of the best reasons to favor putting dividend stocks in your portfolio. Even if you're decades away from retirement, you can reinvest the quarterly payout checks so you amplify your overall returns by accumulating more shares. Closer to retirement, you might switch the payouts so they arrive as cash directly in your portfolio.
Ideally, you can own a collection of dividend stocks that are likely to continue paying and boosting their dividends over many years. Luckily, there's an exchange-traded fund (ETF) that accomplishes that goal with just one purchase. Read on for some great reasons to buy the Vanguard High Dividend Yield ETF(NYSEMKT: VYM).
About the Vanguard High Dividend Yield ETF
ETFs are like mutual funds in that they are baskets of stocks selected for specific characteristics. ETFs are more flexible, however, as they trade during the market day. Many investors prefer index-based ETFs from Vanguard because of their low fees and the company's passive management approach.
The Vanguard High Dividend Yield ETF delivers all these positive factors and more. You'll own over 550 dividend-paying stocks through this fund, with top holdings including established giants like Home Depot and Bank of America. The technology sector is a relatively underrepresented one due to the ETF's focus on dividends. That means you might see a weaker performance during tech-fueled rallies like the one that investors enjoyed in 2023. On the other hand, this ETF will likely outperform during market downturns.
Why buy the fund?
Like its Vanguard peers, the High Dividend Yield ETF charges some of the lowest expenses in the industry. As a result, more of your investing dollars can go toward growth rather than fees. The fund charges an expense ratio of just 0.06%, while peers can charge upwards of 1%.
You'll receive an immediate yield of 2.9% when you buy this fund. This passive income is far more than you'd receive by owning the wider market through a fund like the Vanguard S&P 500 Index(NYSEMKT: VOO) and its 1.3% yield.
Keep in mind that this fund's returns frequently differ from those that track the wider market because its focus is on large dividend-paying stocks. That emphasis makes it stand apart from funds that track the biggest and most profitable companies on the market, which today include many of the "Magnificent Seven" tech giants.
Part of a complete portfolio
That's why this fund fits best in a diversified portfolio that also includes exposure to several high-growth stocks. You likely won't see blowout annual earnings gains from key holdings like PepsiCo, after all.
In contrast, income growth is highly likely for decades to come, given that many of the fund's top holdings have been boosting their payouts for more than 25 consecutive years. That's a major benefit of dominating a large consumer staples market, like Procter & Gamble does, or in controlling several healthcare niches as is the case with Johnson & Johnson.
Put this ETF in a portfolio along with a growth ETF, like the Vanguard Growth ETF(NYSEMKT: VUG), and you'll have a great shot at benefiting from a balance of earnings growth and dividend income for many decades.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Vanguard Index Funds-Vanguard Growth ETF, Vanguard S&P 500 ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
