Anybody looking for a solid global equity income fund might want to look at Vanguard’s FTSE All-World High Dividend Yield ETF (VHYL). I say that for a couple reasons really. Firstly, it comes with the obvious advantage of sporting relatively lower costs versus actively managed funds. The ongoing charge here is 0.29% – not the cheapest passive vehicle by any means, but still very competitive compared to active equity income funds. Secondly, the inherent large-cap value tilt makes it a good fit for the site in general.
The best place to start is with the FTSE All-World High Dividend Yield Index. That is, after all, what this thing is supposed to track! Now, this index starts by taking the broader FTSE All-World Index, excluding REITs. It then ranks the constituents by forecast 12-month dividend yield, eliminating non-dividend-paying stocks in the process. This creates a list of eligible securities, of which the total market capitalisation is recorded. Stocks are then added to the index, in order of rank, until half the market capitalisation of eligible securities is reached.
Though the above may sound slightly convoluted, the net result should be an ETF that tilts towards larger dividend stocks with above-average yields. Indeed, a quick look at its top holdings neatly shows that – with well-known names including the likes of Johnson & Johnson, Procter & Gamble and food giant Nestlé. Those three make up over 5% of the fund’s current holdings as per Vanguard’s website. Some other names in the top-ten include drugmaker Pfizer, banking giant JPMorgan Chase, and American telecom firm AT&T. Total NAV stands at circa $1.1b.
As you can see, the index creation process is a bit more sophisticated than simply picking those stocks with the highest dividend yield out there. What it produces in practice is a kind of large-cap value fund. Granted, dividend yield is probably not the best way to screen for value, but it remains a crude proxy nonetheless. The fund trades at a PE ratio of 14.6 according to Vanguard, clearly much lower than the 21.6 on offer with the simple FTSE All-World ETF.
There are some other things to consider here, starting with the dividend. When it launched back in mid-2013, the fund sported a NAV of $50 (£33) per unit. It has pumped out over $12.60 (£9.15) per unit in cumulative distributions since then. By its nature, it will always offer a higher dividend than the market average – with the current yield standing at around the 3.4% mark according to Vanguard.
Secondly, the fund is very diversified. It held around 1,500 stocks at last count, which is obviously way more than your average actively managed equity income fund. That said, the large-cap tilt means that the top twenty holdings account for a quarter of its assets. Around 40% of the holdings come from the US, with the rest spread across a myriad of international markets. Bear in mind that foreign currency fluctuations and the passive mandate mean that annual distributions can appear quite lumpy.
Now, value has not been a great performer in recent years. The fund’s NAV has only increased to $54.74 per share from its inception value of $50 per share. Performance in sterling is better – with the market value currently standing at £41.20 – due to exchange rate changes. Anyway, underlying total returns have barely hit mid-single-digits per annum since inception. That figure is around three points lower than the simple FTSE All-World Index ETF, just by way of comparison.
The above notwithstanding, the fund should do okay in the long run. Vanguard has the historical earnings growth of its constituents at around 7% per annum. Multiplying the average return on equity (13.7%) by the payout ratio (50%) produces roughly the same figure. All other things being equal, that means we can conservatively ascribe a high single-digit per annum number in terms of future total returns. That also makes it slightly better value than the simple All-World ETF right now.
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