Review of VDY – Vanguard FTSE Canadian High Dividend Yield Index

What’s VDY?

VDY is one of the most popular Canadian dividend ETFs. It provides instant exposure to a high quality portfolio of high dividend paying stocks. In this post, we will be going over VDY’s objective, strategy, volatility and performance. We will also compare VDY stock with its rival ETFs.

VDY is Canadian dividend ETF. It invests exclusively in the Canadian stock market. VDY’s objective is to replicate the performance of the FTSE Canada High Dividend Yield Index, which consists of Canadian stocks having a high dividend yield.

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What is FTSE High Dividend Yield Index?

When selecting a dividend index, especially one like VDY (Vanguard FTSE Canadian High Dividend Yield Index ETF), investors should expect a few key features that will help them achieve consistent returns and mitigate risk. VDY, in particular, follows the FTSE Canada High Dividend Yield Index, which is designed to track Canadian companies that offer above-average dividend yields. Here’s what investors should focus on when considering an index like VDY:

1. Broad Market Exposure with a Focus on Dividends

A good dividend index should provide broad market exposure, while concentrating on companies with strong dividend-paying histories. In the case of VDY, the fund primarily focuses on large, established Canadian companies, with heavy exposure to sectors like financials and energy. These sectors traditionally feature companies that offer stable and attractive dividend payouts. However, it’s important to note that this also leads to sector concentration, which can affect the overall risk profile of the ETF.

2. Consistency in Dividend Payments

Investors in VDY can expect the index to prioritize consistency in dividend payments. VDY excludes companies that do not regularly pay dividends or are not expected to do so in the coming 12 months. This ensures that the fund focuses on reliable companies with a strong track record of returning profits to shareholders, making it an appealing choice for income-focused investors. However, since the fund is Canadian-focused, it will predominantly reflect the performance of domestic companies, which may be more susceptible to local market conditions.

3. High Dividend Yields

One of the main attractions of VDY is its focus on high dividend yields. The index it follows is designed to include companies that provide above-average dividend yields, which can result in a more substantial income stream for investors compared to a broader index that includes lower-yielding stocks. Investors should be aware, however, that a focus on high yield may sometimes expose them to companies whose dividend payments may not be sustainable in the long term if underlying earnings weaken.

4. Sector Concentration Risk

While VDY offers high dividends, it comes with concentration risks, particularly in the financial and energy sectors. Roughly half of the ETF’s holdings are in financial companies like banks and insurance firms, while another large portion is in energy companies. Both sectors are key dividend payers in Canada, but their performance can be heavily influenced by macroeconomic factors such as interest rates and commodity prices. Investors should be aware of this risk when considering the ETF for long-term growth and stability.

5. Liquidity and Regular Rebalancing

VDY also ensures that the companies in its index meet liquidity standards, making it easier for investors to enter and exit positions without large price fluctuations. The ETF is periodically reviewed and rebalanced to reflect the most current market conditions, ensuring that only high-yielding, liquid companies remain in the index. This keeps the portfolio aligned with its objective of providing a solid dividend income stream, while maintaining exposure to Canada’s largest, most stable companies.

6. Ideal for Income Investors

For investors seeking regular income, VDY stands out due to its focus on companies that have the capacity to pay dividends over the long term. The ETF is particularly attractive for those looking for exposure to high-yielding Canadian stocks without having to select individual companies themselves. It simplifies the process by offering a basket of dividend-paying companies, thereby spreading out the risk while ensuring a steady flow of dividend income.

Is VDY a good investment?

VDY stock vs XDV and XEI

In this section, we will compare VDY with Both XDV – Ishares Canadian Select Div Index and XEI – Ishares S&P TSX Comp High Div Index. See tables below:

Table 1: AUM and MER

Looking at the management fees, VDY is attractive. The MER is only 0.21% in comparison with XDV, which stands at 0.55%.

Table 2:  VDY Stock – Performance comparison and analysis

Updated every 15 minutes – VDY Stock

Analysis:

VDY stands out for its long-term performance, leading both the 3-year and 5-year average returns compared to XDV and XEI. This makes it particularly attractive for investors focused on sustained growth over time, especially if looking for dividend-paying Canadian stocks.

Sector Allocation and Diversification:

It’s important to note that both VDY and XEI have a significant portion of their portfolios concentrated in the banking sector, a common characteristic of high-dividend ETFs in Canada. While financials are strong dividend payers, this concentration can expose your portfolio to sector-specific risks. Investors should keep this in mind and ensure that their overall portfolio is diversified across various industries to mitigate these risks.

Holdings and Volatility:

• XDV holds 30 high-dividend stocks, whereas VDY includes 39.
• In terms of volatility, both XDV and VDY show a similar Beta of 0.9, indicating that they are slightly less volatile than the broader market.

Conclusion:

While both ETFs offer stable dividend income with comparable risk (Beta), VDY consistently outperforms XDV in terms of long-term returns. However, it’s important not to solely focus on past performance. Factors like sector concentration, your overall portfolio strategy, and income objectives should guide the final decision.

Table 3: Dividend schedule and Beta

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How much is the dividend for VDY?

VDY pays dividends on a monthly basis. Please refer the last column of the table below for the amount of dividend distribution.

What Holdings are in VDY?

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VDY Sectors allocation

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