1 No-Brainer Vanguard Dividend ETF to Buy Now for Less than $200

Vanguard High Dividend Yield ETF (NYSEMKT:VYM) has a 2.7% dividend yield. That might not sound like a high yield, but it’s more than twice the average value of stocks in the S&P 500 (SNPINDEX: ^GSPC)which gives just under 1.2%. This comparison is actually interesting in another way and highlights the value that the Vanguard High Dividend Yield ETF provides – even if you only have $200 to invest right now.

The first thing investors need to understand about everyone exchange traded fund (ETFs) they buy is the investment approach. These are pooled investment products, so you’re really hiring someone else to handle the investment process for you. You need to make sure you know what they are doing.

The Vanguard High Dividend Yield ETF is an index-based ETF, meaning it simply mimics an index. This index is FTSE High Dividend Yield Index.

The FTSE High Dividend Yield Index is quite simple. The first step in creating the index is to select all companies that pay dividends on US exchanges. The second step is to rank all these companies by yield, from highest to lowest. The third step is to include the top 50% in the index.

The index is weighted by market capitalization, so the largest stocks have the greatest impact on performance. This is fairly easy to understand and clearly focuses investors on the highest yielding stocks. The price for all this is a tiny 0.06% cost ratio.

Some dividend investors may balk at this stage, wondering how an ETF that is designed to buy the highest-yielding stocks can have a yield that actually looks quite modest in absolute terms. The answer comes down to the number of stocks included in the portfolio.

Just like the S&P 500, the Vanguard High Dividend Yield ETF holds about 500 stocks. Although they all pay dividends, the index it tracks actually pushes quite low down the yield range of all dividend-paying stocks. He has no choice given the sheer number of dividend-paying stocks.

But here’s the interesting thing: While a few very large companies have come to dominate the S&P 500’s returns, the Vanguard High Dividend Yield ETF has tracked pretty closely with the market’s performance, as highlighted in the chart. Given the highly diversified portfolio he owns, this is not shocking. This suggests that for a dividend investor, this ETF could replace the S&P 500 as a primary stock holding. Right now might even be a good time to consider a switch given the dynamics driving the S&P 500 today.

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