I had written a prior article on VDAIX (Vanguard Dividend Appreciation Index Fund). VDAIX is an excellent fund if you are looking for quality dividend stocks (not necessarily high dividend yield). I see it more a quality holding and less of a dividend holding. This article is about another awesome fund (Vanguard High Yield Dividend Index Fund, VHDYX).



VHDYX is an index fund. It closely tracks the FTSE High Dividend Yield Index. Stock selection is purely based on dividend payment (For e.g. it does not take into account dividend payment consistency). Any stock which is forecasted (12 Month Forward Dividend Yield) to have an above average dividend yield (excluding REITs) is a part of this fund. Dividends exclude any special distributions. A company will become a constituent in the index if its yield rank is above the 50th percentile. There are no other criteria for selection.



VHDYX contains 401 stocks and has $28.9 billion assets under management (AUM). Top 12 holdings of VHDYX are,



The top 10 companies constitute about 30.6% of the net assets. In spite of being based on dividend yield, VHDYX has good sector diversification (thanks to its market capitalization weighing of stocks). The top two sectors are Technology (15.44%) and Finance (14.05%). In comparison S&P 500 has 24.00% in technology sector.



VHDYX is classified as “Large Value” fund. It is possible that with the current selection of stocks in VHDYX it is tilting towards value. Large capitalization stocks tend to pay higher dividends, hence the bias towards large capitalization stocks. VHDYX maintains a high yield and still manages to diversify across multiple sectors and capitalization. 49% of the stocks in VHDYX has wide economic moat i.e. insulated from competition through size, patents or popularity.



High dividends need not always equate with high quality returns. There are times when VHDYX beat the bench mark S&P 500 index. Looking at the 10-Year annual performance VHDYX has beat S&P 500 index fund (VFINX). Since VHDYX invests in value stocks, it is expected to lag the broad market during a bull market. During a bear market VHDYX could offer a less bumpy ride.



VHDYX price has been on fire since 2008 (as a part of the broader bull market). Its dividend payment has been increasing since second half of 2010. There have been periodic drops in dividend payout. This is to be expected as the stock selection is based on yield and not the ability to sustain dividends. However, on average dividend per share is trending upwards. Dividend yield has been hovering around 2.5% to 3.0%.



VHDYX is one of the best rated mutual funds. US News gives it a score of 9.5/10.0. Morningstar has a 5 star (in the top 10 percentile) rating. Lipper rates mutual funds across 5 categories (Total return, Consistent return, Preservation, Tax Efficiency and Expense). VHDYX has a score of 5 in each of the Lipper categories.



VHDYX is available in two flavors. It’s available as an investor fund and an ETF. This fund is relatively new and does not an admiral class fund yet. To decide between investing ETF or index fund check out my article.



VHDYX has an expense ratio of 0.15%, 85% lower than the average expense ratio of funds with similar holdings. Its 30-day SEC yield is 2.77%. VYM (ETF) has an expense ratio of 0.08%, 92% lower than the average expense ratio of funds with similar holdings. 30-day SEC yield is 2.84%. VHDYX requires a minimum investment of 3,000$. VHDYX has a P/E ratio of 20.5. VYM (ETF) trades for free on Vanguard brokerage account. VHDYX is a relatively new fund and as such does not have an admiral flavor.



The graph below shows the effect of expense ratio on overall returns (Assuming a starting balance of 10,000$ and a yearly return of 8.49%). VHDYX has an expense ratio of 0.15%. According to Morningstar, median expense ratio of comparable fund is 0.89%.



VHDYX is a passively managed index fund. Index funds have low turnover and tend to have limited distributions (short-term and long-term capital gains). Dividends are treated as qualified dividends and are taxed at long term capital gains rates — which are lower than ordinary income tax rates. As such it might find a place both in your taxable and tax-advantaged accounts.



I own VHDYX (large-cap, long-term) in my taxable account. Typical dividend investor yield is between 2 to 4%. In comparison VYM has a yield of 2.84% (without excessive risk). Diversification comes with a cost. VYM does not pick stocks based on valuation. However, I do believe in the long-term things will even out. VYM/VHDYX is definitely a something dividend investors should consider.



Unlike VDAIX/VIG, Vanguard Canada does not have an equivalent ETF for VYM (US). However, there is an ETF which follows a similar strategy and invests exclusively in Canadian stocks. FTSE Canadian High Dividend Yield Index ETF (VDY) has a 12-month TTM yield of 3.32% and 0.20% expense ratio. It is not as well diversified as VYM (US). 64.9% of the portfolio is invested in financial sector.



Source: FTSE MorningStar and Vanguard Canada.