Motley Fool Australia

Is this the only dividend stock you need to buy?


In times of turmoil, I can’t help but look at Warren Buffett’s greatest piece of advice to all investors – “put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s).”

The oracle from Omaha believes long-term results from the benchmark index, such as the S&P/ASX 200 Index (ASX: XJO) will be superior to any of those attained by investors. So far, he’s been right, evidenced by his 10-year wager against New York-based hedge fund, Protégé Partners (which you can read about here).

About ETFs

Investing in index trackers like the Vanguard Australia Share ETF (ASX: VAS) is good for wealth accumulation. The exchange traded fund (ETF) tracks the performance of its benchmark index, growing in value as the share market goes up over time. As most of its earnings are reinvested into the market, investors are often provided lower distributions for the promise of higher capital growth.

Whilst this strategy is ideal for investors with time on their side, those that require income to live off (e.g. retirees) may find index trackers limit their income stream. Accordingly, Vanguard has come up with the Vanguard Australian Shares High Yield ETF (ASX: VHY) (“Vanguard High Yield Fund”) for this very reason.

Diversified yield

The Vanguard High Yield Fund is an index tracker of sorts. It invests in 39 listed securities which it believes will have higher forecast dividends relative to other ASX-listed companies. Some of its notable blue-chip investments include BHP Billiton Limited (ASX: BHP) and Wesfarmers Ltd (ASX: WES), as well as mid-cap stocks like Retail Food Group Limited (ASX: RFG) and FlexiGroup Limited (ASX: FXL). This provides the fund with a solid blend of core and growth assets.

The Vanguard High Yield Fund achieves diversification by restricting the proportion invested in any one industry to 40% of the total ETF value and 10% for any single company. This means its income stream is unlikely to be affected by cyclical events affecting a particular industry.

Fees and performance

Vanguard charges a management fee of 0.25% per annum for managing the portfolio. This is relatively cheap compared to fellow fund manager BlackRock, which charges 0.30% per annum for its iShares S&P/ASX Dividend Opportunities ETF (ASX: IHD).

Vanguard’s performance is admirable also, providing a forecast yield of 5.27% per annum (plus franking credits) and beating the benchmark index return since inception.

Foolish takeaway

Although investing in individual stocks may provide higher dividend returns, many investors may not have the time or knowledge to manage a portfolio.

With Vanguard doing all the hard work for investors, its High Yield Fund provides an excellent option for the income focused investor, making it a great addition to any portfolio.

These Dividend Stocks Could Be Your Next Cash Kings (FREE REPORT)

Motley Fool Australia's Dividend experts recently released a brand-new FREE report revealing 3 dividend stocks with JUICY franked dividends that could keep paying you meaty dividends for years to come.

Our team of investors think these 3 dividend stocks should be a 'must consider' for any savvy dividend investor. But more importantly, could potentially make Australian investors a heap of passive income.

Don't miss out! Simply click the link below to grab your free copy and discover these 3 high conviction stocks now.

Returns As of 6th October 2020

Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Related Articles...