Do Vanguard ETFs Pay Dividends?
Do Vanguard ETFs Pay Dividends?
Most Vanguard exchange-traded funds (ETFs) pay dividends on a regular basis, typically once a quarter or year. Vanguard ETFs specialize in one specific area within stocks or the fixed-income realm.
Vanguard fund investments in stocks or bonds typically pay dividends or interest, which Vanguard distributes back to its shareholders in the form of dividends to meet its investment company tax status.
Vanguard offers investors over 70 different ETFs that specialize in specific sector stocks, stocks of a certain market capitalization, foreign stocks, and government and corporate bonds of different durations and levels of risk. The majority of Vanguard ETFs are rated four stars by Morningstar, Inc., with some funds having five or three stars.
Understanding Vanguard ETF Dividends
Vanguard ETF Expense Ratios
One of the more unique features of Vanguard funds, in general, is they are known in the fund industry for expense ratios that are lower than average. As of September 2021, Vanguard ETFs' net expense ratio ranges between 0.03% and 0.28%, while the average expense ratio as of December 2020 is about 0.06% for a typical Vanguard ETF.
- Most of Vanguard's 70-plus ETFs pay dividends.
- Vanguard ETFs are noted in the industry for their lower-than-average expense ratios.
- Most of Vanguard's ETF products pay quarterly dividends; some pay annual dividends; and a few pay monthly dividends.
The most expensive Vanguard ETFs tend to be those that invest overseas or have high turnover ratios and specialize in very narrow market niches. The least expensive Vanguard ETFs tend to be those that specialize in corporate or treasury bonds.
Vanguard ETF Dividend Yields
ETFs are typically judged on their dividend distributions based on a 30-day SEC yield, which is a standardized yield developed by the Securities and Exchange Commission (SEC) for the fair comparison of funds. The 30-day SEC yield is calculated based on the last 30-day period and reflects investment income earned by a fund after deducting its expenses.
As of September 2021, over 70 Vanguard ETFs pay dividends in the form of quarterly or annual distributions. While it is fairly uncommon, there are a few Vanguard funds that pay dividends monthly. The 30-day SEC yield for Vanguard ETFs ranges between 0.18% and 3.88% as of September 2021.
2 Vanguard Dividend ETFs Under the Microscope
A version of this article previously appeared in the July 2021 issue of Morningstar ETFInvestor. Click here to download a complimentary copy.
We previously classified dividend strategies along the growth-income spectrum in our white paper, “Dividend Funds Under the Microscope.”  Our classifications rest on the premise that dividend-income funds gravitate toward stocks with higher current yields, while dividend-growth funds forgo some amount of current dividend yield in order to favor stocks poised to grow their dividends. Here, I’ll examine this trade-off in more detail, with a case study that puts a pair of Morningstar Medalist dividend exchange-traded funds under the microscope.
I’ve chosen Vanguard Dividend Appreciation ETF (VIG) to represent the dividend-growth group and Vanguard High Dividend Yield ETF (VYM) for the dividend-income group. Both carry Morningstar Analyst Ratings of Gold. VIG singles out stocks with a long history of growing their annual dividends, while VYM tracks the highest-ranking half of the U.S. equity market by forward dividend yield.
To compare the funds’ approach to stock selection, I’ve parsed patterns in their holdings’ dividends. The survival rate--featured in Exhibit 2--is the ratio of the number of holdings that continued to grow their dividends for the period in question divided by the total number of portfolio holdings at the onset of the period. I broke these figures down further to separate statistics for the funds’ shared holdings and unique holdings to further highlight the differences in their approaches. As both funds’ underlying indexes reconstitute in March, I used end-March portfolio data in 2018 and 2016 for the trailing three-year and five-year periods, respectively. I calculated stocks’ dividend growth rates by comparing their 2020 annual dividends against their annual dividends in 2017 and 2015, respectively.
The survival rate of stocks in VIG’s March 2016 and March 2018 portfolios was upward of 90%. This was significantly higher than its yield-oriented cousin, VYM, which saw nearly half of its March 2016 portfolio drop out by the end of 2020. Not only have the stocks in VIG’s portfolio had more staying power, they’ve also been more likely to grow their dividends. As shown in Exhibit 1, nearly 91% of the stocks in VIG’s March 2018 portfolio had increased their dividends through 2020. These stocks represented 93% of its assets. Just two thirds of the stocks in VYM’s portfolio grew their dividends over that same span. These stocks represented 84% of the value of its portfolio, which is an artifact of weighting stocks by market cap. These differences are even more stark when comparing the funds’ March 2016 portfolios.
The same patterns repeat when sorting the funds’ holdings on the basis of which were shared and which were unique across the two portfolios. This data is featured in Exhibit 2. Roughly 61% of VYM’s unique holdings maintained their dividend growth over the three-year period, and just over half kept their dividends growing for the five-year period. Meanwhile, the three- and five-year survival rates for VIG’s unique holdings remained largely unchanged at 90% and 89%, respectively.
Survival rates are highest among the fund’s shared holdings. Among the 56 stocks that featured in both funds’ March 2018 portfolios, just four either decreased or suspended their dividends as of the end of 2020. This translated to a 93% survival rate among these shared holdings. For the funds’ March 2016 portfolios, this number dropped to 89%, with eight out of the funds’ 73 shared holdings seeing their dividend growth falter.
The strict inclusion criteria that VIG employs have clearly paid off in the form of a steady stream of dividends. Its 10-year dividend growth requirement and additional quality screen have yielded a portfolio of stocks that are much more likely to maintain and grow their dividends. As it screens stocks exclusively on the basis of their 12-month forward dividend yields, VYM’s constituents’ dividends have not been nearly as durable. While the holdings it had in common with VIG improved its overall survival rate, they seem to be the outliers in its portfolio. Looking at these portfolios’ vitals can give us a better understanding as to why.
Homing in on Holdings’ Vitals
Exhibit 3 features data that measures the two funds’ fundamentals on the basis of quality (Morningstar Economic Moat Rating, profitability, financial health, leverage) and valuation (valuation ratios, dividend yield). These figures represent data for equal-weighted portfolios of the funds’ March 2016 and March 2018 holdings.
The two funds’ shared holdings seem to offer a “best-of-both-worlds” balance between dividend growth and current dividend income. A greater portion of them enjoy either a narrow or wide moat than either VIG’s or VYM’s unique holdings. Nonetheless, VIG’s unique holdings do not lag far behind, while VYM has very few unique holdings with wide moats. The pattern is the same for their profitability metrics. Companies that make it into VIG’s lineup tend to be established businesses with stable cash flows.
Stable stocks tend to be more expensive. VYM’s unique holdings have much lower valuations than both of the comparison portfolios. Within VIG’s portfolio, the holdings it shares with VYM tend to be more profitable, but they are also more leveraged.
In terms of yield, VYM’s unique holdings predictably rank higher than VIG’s unique positions. And, as expected, VYM lags both when it comes to the aggregated dividend growth of its holdings. This is partly attributable to the high percentage of its holdings that either decreased or suspended their dividends. While VYM’s index removes stocks that suspend their dividend, those that reduce their payouts but still pass its yield criteria can linger in the portfolio.
Companies with the capacity to grow their dividends over an extended period of time are often mature, profitable businesses. Not only do these companies’ dividends tend to be more durable, but they generally weather downturns better than less-established franchises. This is evident in VIG’s and VYM’s drawdowns since their common inception in 2006, which are plotted in Exhibit 4. VIG’s emphasis on dividend growth has resulted in lower volatility and materially smaller drawdowns relative to VYM. From peak to trough, it outperformed VYM by 8.87 and 4.74 percentage points during the 2008 global financial crisis and the 2020 coronavirus-driven sell-off, respectively.
But Weight Just a Minute
While VYM’s vitals don’t look great in our hypothetical equal-weighted portfolio, it’s important to point out that the fund hasn’t actually allocated a large portion of its assets to stocks that failed to grow their dividends. VYM weights stocks by market cap. So while many of the stocks it has owned over the years have cut or suspended their dividends, most of them had negligible weights in the portfolio. As a result of weighting stocks based on market cap, VYM strikes a better balance between dividend growth and current dividend yield than many of its yield-focused peers.
Many yield-focused funds weight stocks on other measures, like dividend yield. While this further boosts current yield, it also increases risk. One example is Vectren, one of VIG and VYM’s shared holdings that decreased and eventually suspended its dividend. The stock accounted for 1.3% of Silver-rated SPDR S&P Dividend ETF (SDY)’s portfolio in March 2018. SDY weights stocks by their yield. In contrast, its weight in VIG’s portfolio was 0.12% and its weight in VYM’s portfolio was 0.05%. Both funds weight stocks by market cap.
While this case study gives us a better understanding of the trade-offs involved for investors considering growth- and yield-oriented dividend funds, it is just one case among many. As always, deeper diligence is required. Our example illustrates many of the key considerations investors should take into account when analyzing these funds.
Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Morningstar, Inc. does not market, sell, or make any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.
3 Vanguard Dividend ETFs That Could Make You Rich
Dividend stocks can be a smart addition to your portfolio, as they provide long-term earning potential as well as a source of passive income.
However, choosing dividend stocks can be challenging. Investing in individual stocks requires a substantial amount of research, and it's often expensive as well.
If you're looking for a less research-intensive approach, investing in a dividend ETF may be your best bet. Each ETF can contain hundreds of different stocks, which instantly diversifies your portfolio and limits your risk. There are many dividend ETFs to choose from, but these three Vanguard powerhouses are a great place to start.
Image source: Getty Images.
1. Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF(NYSEMKT:VIG) tracks the NASDAQ US Dividend Achievers Select Index, and it includes just over 200 stocks from large companies that have a history of increasing their dividend payment year over year.
This ETF was established in 2006, and since then it has earned an average rate of return of nearly 10% per year. If you were to invest around $300 per month in this ETF earning a 10% annual rate of return, you'd have nearly $600,000 accumulated after 30 years.
Also, this fund has paid quarterly dividends of around $0.50 to $0.60 per share over the past year. That may not sound like much, but each share of this ETF costs around $150. Over time, depending on how much you can afford to invest, you could potentially earn thousands of dollars per year in passive dividend income.
2. Vanguard International High Dividend Yield ETF (VYMI)
The Vanguard International High Dividend Yield ETF (NYSEMKT:VYMI) contains nearly 1,200 stocks from companies around the world that have the potential for above-average dividend yields.
This ETF is on the riskier side, so it's important to assess your risk tolerance before investing. It was established in 2016, making it the youngest ETF on the list. Also, just over one-quarter of the fund is allocated toward emerging markets, which can be volatile but also have more room for growth.
Since its inception, it has earned an average rate of return of around 9% per year. And over the past year, it's paid quarterly dividends of around $0.50 per share. This makes it similar to the Vanguard Dividend Appreciation Fund ETF in terms of returns. However, this ETF carries more risk with the potential for above-average growth over time.
3. Vanguard High Dividend Yield ETF (VYM)
The Vanguard High Dividend Yield ETF(NYSEMKT:VYM) is similar to the previous fund, except it only contains U.S.-based companies rather than international stocks. It includes just over 400 stocks from companies with higher-than-average dividend yields.
This ETF is less risky than its international counterpart, and it also has a longer track record, as it was established in 2006. However, it's also experienced slightly lower returns of around 8% per year, on average, since its inception.
When it comes to dividend payments, though, this fund shines. Over the past year, it has paid quarterly dividends of around $0.70 to $0.80 per share, which can add up substantially over time.
This ETF trades for around $100 per share. Say you've been investing for many years, and you now own 1,000 shares. If you're receiving $0.70 per share in quarterly dividends, that's $700 per quarter, or $2,800 per year in passive income. And the more you invest, the more you can earn in dividend payments.
Dividend ETFs can help you build a healthy portfolio while also creating a source of long-term passive income, making them a smart investment for many people. Before you invest, consider your tolerance for risk to decide which of these ETFs is right for you. By choosing the right investment, you can potentially make a lot of money in the stock market.
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