Whether you’re an experienced investor or just starting out, exchange-traded funds (ETFs) can be a great addition to your portfolio because of their diversification and simplicity. Vanguard is one of the largest investment firms in the world and offers numerous low-cost ETFs like the Vanguard High Dividend Yield ETF (NYSEMKT:VYM).
Another good option is dividend-paying companies that have a proven track record of growing profits and increasing their payouts over time. Utility American Electricity (NASDAQ:AEP) is a stable, loyal oilfield services company Baker Hughes (NASDAQ:BKR) carries higher risk, but also higher growth potential.
Here’s why these income-producing investments are worth a closer look.
Your affordable ticket to capital gains
Daniel Foelber (Vanguard High Dividend Yield ETF): With net assets of $67.9 billion, the Vanguard High Dividend Yield ETF is a comprehensive yet cost-effective way to gain diversification across high-quality dividend stocks. The fund has an expense ratio of 0.06%, which is slightly higher than funds like this Vanguard Growth ETF or Vanguard Value ETF, both of which have an expense ratio of 0.04%. Even if you invest hundreds of thousands of dollars in these funds, the difference is negligible. For example, a $100,000 investment would only cost $60 at an expense ratio of 0.06%, compared to $40 at 0.04%. Vanguard makes money because it manages trillions of dollars and therefore can afford to charge dirt cheap fees.
The High Dividend Yield ETF has 451 holdings with an average price-to-earnings ratio of just 16.3 and a dividend yield of 2.8%. For comparison, the Vanguard S&P 500 ETF has a P/E ratio of 26 and a yield of just 1.3%.
The High Dividend Yield ETF achieves a lower multiple and higher yield by avoiding expensive growth stocks and targeting the cheaper sectors of the stock market. Sectors such as consumer staples, energy, financials, utilities and industrials are overweight.
Top stocks are not “Magnificent Seven” stocks Microsoft or Nvidiabut dividend kings like Procter & Gamble And Walmart. If the fund invests in technology, it does so through, for example, a dividend-paying chip stock Broadcom. Its top healthcare stocks are stodgy dividend-paying companies like Johnson & Johnson. The fund holds investments in drug manufacturers with high returns such as: Merck And AbbVieno high flyer like that Eli Lilly.
With a focus on blue-chip stocks, value and income, the fund is a good choice for investors looking for reliable passive income and capital preservation rather than innovative growth stocks driving today’s bull market.
American Electric Power can supercharge your passive income stream
Scott Levine (American Electric Power): There’s no denying that a high-yield Vanguard fund is tempting, but choosing a single stock with a high payout can also be appealing — especially if it’s in the bargain bin. With that in mind, American Electric Power is certainly a stock that income investors should keep an eye on. Given the electric utility’s stock’s cheap valuation and its expected 4.2% dividend, today seems like a good time for income investors to hit the buy button on American Electric Power stock.
Investors often shy away from the idea of buying stocks with high dividend yields because they are unsure whether the company will be able to maintain the dividend or whether the high payout will put the company’s finances at risk. These concerns are easily addressed with a regulated utility like American Electric Power. Because American Electric Power operates in regulated markets, it guarantees certain returns. This gives management a good overview of future cash flows and helps them plan capital expenditure accordingly.
From 2024 to 2028, American Electric Power’s projects will generate $38 billion in operating cash flow and pay $11.2 billion in dividends to investors. In terms of earnings, American Electric Power is targeting a conservative payout ratio of 60% to 70% – something that seems achievable considering its five-year average payout ratio is 68.9%.
Currently, American Electric Power shares trade at 7.6 times operating cash flow, a discount to its five-year average cash flow multiple of 9.6. But that’s not the only reason why the share appears to be attractively valued. In terms of earnings, American Electric Power stock has a price-to-earnings ratio of 19.8, which is lower than its five-year average P/E ratio of 20.1 S&P 500Win multiplier of 28.25.
Investors interested in rising energy prices should consider Baker Hughes
Lee Samaha (Baker Hughes): Unfortunately, the world is an unstable place and a lot of oil is produced in areas of geopolitical instability. Additionally, there is always the possibility that they will become more unstable in the current environment. This is not the place to speculate on such topics, but suffice it to say that Reuters has reported significant purchases of energy-related futures by hedge funds recently.
Add to that OPEC and OPEC+ production cuts led by Saudi Arabia and Russia to support prices, and there are many reasons to believe that relatively high oil prices will continue. It also supports the idea that who invests in energy and where will change. All of this is positive for the prospects of Baker Hughes, a stock included in the Vanguard High Dividend Yield ETF.
However, the company is far from relying on traditional fossil fuels. In fact, Baker Hughes is expanding its liquefied natural gas assets and services and is also rapidly expanding its “new energy” contracts (expected to triple in size from 2021 to 2024, reaching $800 billion to $1 billion), with a value of $6 to 1 billion Expected to be $7 billion in 2030.
Management’s median earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates EBITDA of $4.3 billion in 2024, a number that gives the stock a future ratio of enterprise value (market capitalization plus net debt) to EBITDA of less than 4.3 billion US dollars brought nine. This is attractive in itself, and even more so in the current environment where there is an upward risk to energy prices.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Value ETF, Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF and Walmart. The Motley Fool recommends Broadcom and Johnson & Johnson and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
If you like this high-yield Vanguard fund, then you’ll love these two dividend stocks, originally published by The Motley Fool