There are some excellent high-dividend ETFs you can buy, and with a strong economy and a high likelihood that interest rates will come down soon, now could be a great time to invest. But my favorite way to get high-dividend stock exposure right now isn’t with a U.S. dividend ETF.
I recently added the Vanguard International High Dividend Yield ETF (NASDAQ: VYMI) to my portfolio. Not only does it have a higher yield than its U.S. counterparts and a less concentrated portfolio, but it also looks extremely cheap right now. Here’s what you need to know.
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What is the Vanguard International High Dividend Yield ETF?
As the name suggests, this is an index fund that invests in international stocks with above-average dividend yields. But there are some important details to unpack here.
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First, this is a highly diversified ETF. It is a weighted ETF, which means that larger companies make up more of its assets, but there are more than 1,500 stocks in its benchmark index and no stock makes up more than 2% of the portfolio.
Second, as a Vanguard index fund, the Vanguard International High Dividend Yield ETF is a low-cost way to invest in non-U.S. companies. It has a 0.22% expense ratio, which is higher than you’d pay for something like an S&P 500 ETF but is significantly lower than the industry average for an international stock fund.
In addition, the Vanguard International High Dividend Yield ETF receives dividends from the underlying stocks in its portfolio and passes them through to investors. As of this writing, the ETF has a dividend yield of about 4.2%, which is significantly higher than most “high dividend” ETFs that invest in U.S. stocks pay.
Finally, although this is an international stock ETF, that doesn’t mean you’re investing in a portfolio of obscure businesses you’ve never heard of. There is certainly some element of that, but top investments in the portfolio include household names such as Nestle, Novartis, Toyota, and Royal Bank of Canada. They just all happen to be based outside the United States.
A bargain ETF?
The Vanguard International High Dividend Yield ETF is trading near its 52-week high, but that doesn’t necessarily mean it’s expensive. In fact, most of the key metrics would indicate the exact opposite.
For example, the average stock in the ETF trades for 12 times earnings and 1.4 times book value, and the average earnings growth rate in the portfolio is 13.7%. This implies a price-to-earnings growth (PEG) ratio of about 0.88. I generally consider anything under 1 to be very cheap.
To put this in perspective, consider that the U.S. version of the ETF, the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) owns 585 stocks with an average P/E ratio 19.1 and an average earnings growth rate of 10.7%, a PEG ratio of 1.78, which still isn’t terribly expensive. Of course, there are some additional risks involved with investing in international stocks, such as currency fluctuations and tariff uncertainty, but this is still a massive valuation gap.
With a cheap valuation, a portfolio that owns some excellent businesses, and a high dividend yield, the Vanguard International High Dividend Yield ETF could be worth a closer look right now. I recently added it to my own portfolio, and I plan to continue to gradually add shares over time.
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Matt Frankel has positions in Vanguard International High Dividend Yield ETF. The Motley Fool has positions in and recommends Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Nestlé. The Motley Fool has a disclosure policy.
