Could Simple Savings Transform Your Financial Future? Understanding Vanguard’s High Dividend Yield ETF
Analysis from the Labor Department reveals that the median weekly income for U.S. workers reached $1,165 in the third quarter. This amounts to approximately $60,500 annually, leading to an after-tax income estimation of around $45,000 even under less favorable conditions. Financial experts often recommend that individuals save about 20% of their after-tax income for retirement, translating to about $9,000 annually, or $750 monthly, for the average worker.
However, it is important to emphasize that even smaller, consistent investments can significantly impact one’s financial portfolio by retirement. This perspective does not suggest reducing savings below the recommended 20%, but rather highlights the power of disciplined investing to accumulate substantial wealth over time.
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Investing $375 each month in the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) could result in a portfolio valued at roughly $569,400 over 30 years, providing an estimated $17,200 in annual dividend income. Here are the crucial details regarding this investment option.
Understanding the Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF is designed to follow the performance of 537 large U.S. companies known for offering above-average dividend yields. This index fund predominantly focuses on value stocks from three key sectors: financials (23%), industrials (13%), and healthcare (11%).
Below are the 10 largest holdings by weight:
- Broadcom: 3.9%
- JPMorgan Chase: 3.8%
- ExxonMobil: 2.8%
- Home Depot: 2.3%
- Procter & Gamble: 2.2%
- Walmart: 2.1%
- Johnson & Johnson: 2%
- AbbVie: 1.7%
- Bank of America: 1.7%
- Chevron: 1.4%
Three notable features make the Vanguard High Dividend Yield ETF appealing, especially for conservative investors.
Firstly, it boasts a low expense ratio of 0.06%. This means annual fees total just $6 for every $10,000 invested in the fund, which is significantly lower than the average expense ratio of 0.36% for U.S. index and mutual funds cited by Morningstar in 2023.
Secondly, while not typically outpacing the S&P 500 (SNPINDEX: ^GSPC) during market upswings, the Vanguard High Dividend Yield ETF outperformed it by eight percentage points amid the previous bear market. This attribute showcases its lower volatility, reflected in a three-year beta of 0.81, indicating that it moved 81 basis points for every 100-basis point shift in the S&P 500 over the last three years.
Lastly, disciplined investors who consistently acquire shares of the Vanguard High Dividend Yield ETF can cultivate a notable portfolio generating considerable annual dividend income. A forthcoming example will further illustrate this point.
Image source: Getty Images.
Projected Earnings with Regular Monthly Investments
Since its inception in November 2006, the Vanguard High Dividend Yield ETF has achieved an impressive total return of 349%, averaging 8.6% annually. This performance number may appear lower due to the Great Recession’s onset within a year after the ETF’s launch. Notably, the ETF returned 9.7% annually over the past decade.
For a conservative estimate, if we predict an annual return of 8.6% going forward, contributing $375 monthly could yield a value of approximately $569,400 in 30 years, assuming dividends are reinvested. Once dividends are no longer reinvested, investors can enjoy passive income during their retirement years.
Historically, over the last ten years, the Vanguard High Dividend Yield ETF has provided an average dividend yield of 3.03%. With that yield, a portfolio valued at $569,400 could generate over $17,200 annually in dividend income. Moreover, that income potential will likely grow if the initial investment remains intact.
For context, the ETF has delivered a return of 5.2% annually when excluding dividends since its inception. At this rate, after an additional five years, the original portfolio would appreciate to $733,600. Consequently, with a continued dividend yield of 3.03%, this larger portfolio could offer about $22,200 in annual income.
In conclusion, the Vanguard High Dividend Yield ETF is an excellent option for those with low risk tolerance. Yet, more aggressive investors may find better opportunities through options like the S&P 500, which has surged 510% since November 2006, significantly outperforming the Vanguard ETF by 160 percentage points. This evidence supports the merits of diversifying portfolios with S&P 500 index funds and individual stock investments for those prepared to engage in more extensive research.
Is it the Right Time to Invest $1,000 in Vanguard High Dividend Yield ETF?
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Bank of America and JPMorgan Chase are partners of Motley Fool Money. Trevor Jennewine holds no positions in the stocks mentioned. Motley Fool recommends AbbVie, Bank of America, Chevron, Home Depot, JPMorgan Chase, Vanguard High Dividend Yield ETF, and Walmart, while also recommending Broadcom and Johnson & Johnson. For more information, refer to the Motley Fool’s disclosure policy.
The views expressed here are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.
