VYM: Key catalysts for this blue chip dividend ETF

The Vanguard High Dividend Yield Index Fund (VYM) ETF has done well this year as its total return rose by 17%. It has outperformed other popular dividend-focused funds like the Schwab US Dividend ETF (SCHD), iShares Core High Dividend ETF (HDV), and the SPDR S&P Dividend ETF (SDY).

Blue-chip dividend ETF

VYM is a popular dividend ETF with over $72 billion in assets under management. It is a low-cost fund with an expense ratio of 0.06%.

Established in 2006, the fund tracks the FTSE High Dividend Yield Index, which is made up of companies that have higher dividend yields.

This is notable because, historically, high dividend yield companies tend to underperform the market. Dividend yield is calculated by dividing the annual dividend per share and the current share price multiplied by 100. Therefore, high-performing companies always have a lower dividend yield. For example, Nvidia yields just 0.03%.

VYM started trading at $28.45 in 2006 and its stock has soared to $127 today, meaning that a $10,000 investment would now be worth over $44,600. Dividends included the amount would be worth over $60,000.

The VYM ETF has a dividend yield of 2.84% and a five-year compounded growth rate of 5.32%, which is lower than some of its competitors. 

A 2.8% yield means that one cannot expect substantial dividends over time. For example, all factors constant, a $10,000 investment will bring in just $280 a year. The Vanguard S&P 500 ETF (VOO), with its 1.28% yield will bring in about $128 and more stock return.

Top VYM companies

The VYM ETF is a very broad ETF with 550 companies. It is a relatively cheaper fund with an average price-to-earnings ratio of 19.6, which is lower than the S&P 500 average of 21. Its average price-to-book ratio of 2.8 is also lower than other popular funds. 

Most companies in the Vanguard High Dividend Yield Index Fund are in the financial services industry, accounting for 20.8% of the entire portfolio. It is followed by industrials and healthcare, which have a 12.70% and 12.1% share. The other big industries in the fund are consumer discretionary, technology, and utilities. 

The biggest companies in the fund are Broadcom, JPMorgan, ExxonMobil, Procter & Gamble, Johnson & Johnson, and Home Depot. All these are blue-chip companies that have demonstrated years of revenue and profitability growth.

Key catalysts for the Vanguard High Dividend Yield Index Fund

There are three potential catalysts for the VYM ETF. First, the Federal Reserve is expected to continue cutting interest rates in the next few meetings. It has already delivered a jumbo cut of 0.50%, and analysts expect a series of 0.25% cuts to follow.

Interest rate cuts are often positive for stocks in general because they lead to a rotation from bonds to equities. This is notable because investors have packed over $6.1 trillion in money market funds, which will move to equities in the coming months.

The challenge is that these money market funds are still earning over 4% returns. The 10-year yield remains at 4.02% while the 2-year stands at 3.95%.

Second, the next important catalyst will be the upcoming earning season, which starts on Friday. JPMorgan, the second-biggest company in the fund, will be the first company to publish its earnings. Analysts expect banks and other companies in the financial services industry to report weaker results because of low net interest income.

ExxonMobil has already warned that its earnings will be weak because energy prices during the quarter. This could change now that crude oil prices has rebounded amid the ongoing tensions in the Middle East. 

Procter & Gamble, the biggest fast-moving consumer goods (FMCG) company with a $400 billion valuation, will publish its results on October 18 (Thursday). These results will likely show that its business remained under pressure as consumer spending eased.

The other top VYM constituent companies to watch will be Broadcom, Walmart, Merck, and Coca-Cola.

Altogether, FactSet expects that earnings growth will be 4.2%, the fifth straight quarter of earnings growth.

VYM ETF technical analysis

VYM chart by TradingView

The weekly chart shows that the VYM ETF has been in a strong bull run. It has moved above the crucial resistance point at $106.58, its highest point in 2022 and 2023. It was also the upper side of the ascending triangle pattern.

The Vanguard High Dividend Yield Index Fund has remained above the 50-week and 100-week Weighted Moving Averages (WMA).

Also, the Money Flow Index (MFI) has moved above the neutral point of 50. The Relative Strength Index (RSI) has formed a bearish divergence chart pattern.

Therefore, the outlook for the VYM ETF is bullish in the long term, with the next point to watch being at $135. In the short term, however, the fund may have a pull back, with the next point to watch being at $120.

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