Popular Vanguard Dividend Fund Earns Upgrade

When it comes to stocks, analyst upgrades and downgrades often make for good headlines and, in some cases, are worth following. However, upgrades and downgrades are not the end all and be all of securities selection.

The same is true of index funds and exchange traded funds. For investors knew to the game, it should be pointed out that some research firms assign ratings to funds as so many banks do with individual stocks. Typically, ETF and index fund ratings are confined to large products from large issues, such as Vanguard.

With that in mind, it’s worth noting that the Vanguard High Yield Dividend Index (VHYAX) was recently upgraded to gold from silver by Morningstar. Among fund upgrades, this is arguably notable because across the index fund and ETF structures, this high dividend offering had a whopping $61.7 billion in assets under management, as of Aug. 31.

VHYAX’s ETF equivalent is the Vanguard High Dividend ETF (NYSEARCA: VYM), which is one of the largest US-listed dividend ETFs. Both products benchmark to the FTSE High Dividend Yield Index.

VHYAX Advantages

As is the case with any other index fund or ETF, methodology matters with VHYAX and that means some time should be allocated to understanding how the FTSE High Dividend Yield Index works.

That gauge “starts with the FTSE USA Index and ranks its constituents by their projected 12-month yield. As it aims for 50% market-cap coverage of this cohort, the fund tends to own about 400 to 450 stocks. Companies that have not paid dividends in the past 12 months are not eligible,” according to Morningtar.

In other words, VHYAX doesn’t rely on dividend increase streaks to build its basket of holdings, but dividend offenders and skippers aren’t going to make the cut to enter the fund’s index. Likewise, while the index fund is designed to be a high dividend strategy, its 30-day SEC yield of 3.28% isn’t alarmingly high nor does it imply the fund is littered with at-risk dividend payers. It’s not.

Although it’s a high dividend fund, VHYAX has barely any real estate exposure and devotes less than 7% of its weight to utilities stocks. Those could be reasons why the fund’s holdings score well in terms of financial health – a key attribute for dividend investors.

“Current holdings will stay in the index until their yield falls below the 55th percentile, while new entrants can only be added after their yield passes the 45th percentile. This has helped keep a lid on turnover: The fund’s 9% turnover ratio came in about 50 percentage points lower than its average peer in 2022,” adds Morningstar.

VHYAX/VYM Differences

While VHYAX and VYM, the ETF, follow the same index, there are differences between the two products for advisors to ponder.

Notably, the index fund has a minimum investment of $3,000 and an annual fee of 0.08%, or $8 on a $10,000 stake. While that’s far cheaper than the category average, VYM – VHYAX’s ETF sibling – chargest just 0.06% per year and has no required minimum investment.

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