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Unlocking Passive Income: Vanguard's High Dividend ETF for Defensive Returns

Unlocking Passive Income: Vanguard's High Dividend ETF for Defensive Returns
Unlocking Passive Income: Vanguard's High Dividend ETF for Defensive Returns

Diversified Passive Income through Vanguard's High Dividend ETF

Exchange-traded funds (ETFs) offer investors an efficient way to diversify their portfolios and earn passive income. One such ETF is the Vanguard High Dividend Yield ETF (VYM), which invests in 451 high-yielding large-cap stocks.

Sector Allocation and Yield

VYM's sector allocation differs significantly from traditional index funds due to its focus on dividend yield. The financial sector accounts for 21.8% of its holdings, followed by industrials (12.4%) and consumer staples (11.9%). This allocation provides investors with exposure to mature industries and established companies.

VYM's dividend yield currently stands at 3.0% annually, significantly higher than the 1.4% yield of an S&P 500 index fund. By reinvesting these dividends, investors can compound their returns over time, leading to a potentially substantial income stream.

Defensive Characteristics and Cost-Effectiveness

VYM's allocation away from tech growth stocks makes it a more defensive investment, outperforming during market downturns. In 2022, VYM ended the year flat while the S&P 500 fell 18.1%.

VYM is also cost-effective, with an expense ratio of only 0.06%. This low fee structure preserves returns over the long term.

Considerations and Portfolio Strategy

VYM's focus on mature industries may result in underperformance during market rallies, such as the one observed in 2023. To mitigate this risk, consider pairing VYM with a growth ETF like Vanguard Growth ETF (VUG).

VYM is a suitable investment for individuals seeking a defensive option that provides income and stability. It can complement high-growth stocks or other ETFs within a diversified portfolio.

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