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ETF Investing

VYM: The Best High Dividend Yield ETF?

When dealing with your retirement savings you need to remember a couple things:

  • First, always remember to be focused on the long term.
  • Second, you want something that’s high-quality, low-maintenance and beats the overall market.

I know, it sounds pretty obvious, but it’s not always easy to find investments with all of those qualities…

Some people like mutual funds and others are jumping on the ETF bandwagon. However, besides the pricing, is there any difference in using one or the other for retirement investing?

Let’s see…

It’s Not What it Used to Be…

The expense difference between mutual funds and ETFs isn’t what it used to be.

About two years ago, possibly the biggest factors in buying ETFs was that they had lower expense ratios than most index funds.

On the flip side, you had to pay a commission to buy them since they can only be traded through brokerage accounts.

But now the difference isn’t so big because:

  • Lately a number of brokerages like Vanguard, Fidelity and Schwab allow for commission-free trades of certain low-cost ETFs.
  • ETFs no longer lead the way with low expense ratios. If you have $10,000 or more to invest in a given fund, you can have access to the “Admiral shares” of most Vanguard funds. They usually have expense ratios as low as the lowest-cost ETFs. (Before October 2010, the Admiral shares had a minimum initial investment of $100,000 rather than $10,000.)

Lump Sums vs. Monthly Contributions

The right choice between a mutual fund and ETF may just come down to whether you want to invest a big chunk of money all at once or smaller chunks of money over time.

If you want to invest a big chunk at once – for example, you’re doing a rollover of a 401(k) or an IRA – you’re better off with an ETF.

By contrast, if you want to invest $300 a month (or make smaller contributions now and then), you’re probably better off in a regular mutual fund; overall, the fees will be lower.

If You’re Going the Lump Sum Route…

One of the best ETFs to consider if you’re going the lump-sum route is Vanguard High Dividend Yield ETF (NYSE: VYM). VYM tracks the FTSE High Dividend Yield Index – a custom index that the FTSE Group developed with Vanguard.

The index is constructed from U.S. stocks with higher-than-average dividend yields, and it contains no REITs or stocks that aren’t expected to make a dividend payout over the next 12 months.

Fees make an enormous difference to long-term investment returns! The ETF’s expense ratio of 13 basis points (0.13%) makes it cheaper than 89% of its peers. And imagine all the transaction fees you’re saving from investing in each company individually.

Here are the month-end 10 largest holdings (34.2% of total net assets) as of 2/29/2012:

  1. Exxon Mobil Corp. (NYSE: XOM)
  2. Microsoft Corp. (Nasdaq: MSFT)
  3. Chevron Corp. (NYSE: CVX)
  4. General Electric Co. (NYSE: GE)
  5. Procter & Gamble Co. (NYSE: PG)
  6. AT&T Inc. (NYSE: T)
  7. Johnson & Johnson (NYSE: JNJ)
  8. Pfizer Inc. (NYSE: PFE)
  9. Coca-Cola Co. (NYSE: KO)
  10. Wal-Mart Stores Inc. (NYSE: WMT)

So what do you get for your retirement account?

  • A diversified mix of some of the best dividend payers out there that will send you a dividend check every quarter.
  • A current yield at 3.2% according to Morningstar. It’s historically yielded one percentage point more than the S&P 500 Index.

And that’s not too shabby.

Good Investing,

Jason Jenkins

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

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