Income investors like dividend stocks because they not only make regular payments to shareholders but also have growth potential for the long haul. The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) has done a good job over time of identifying dividend stocks that pay above-average yields and also have room to move higher, and the exchange traded fund's long-term returns have been solid. So far in 2017, however, the Vanguard ETF has lagged behind the broader market, and some investors are nervous that the underperformance could be just the initial warning signs of an adverse trend to come for the ETF and for dividend-focused investments in general.
The biggest drags on Vanguard High Dividend Yield's performance
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Even though the overall market has gained ground this year, some sectors of the stock market haven't been as lucky, and those laggards show up clearly among Vanguard High Dividend Yield's top holdings. The energy sector has taken a hard hit in 2017, as oil prices have renewed their downward trend after recovering somewhat in 2016. Falling crude has put pressure on players from the largest integrated oil companies in the world to smaller exploration and production companies, and even Dow components ExxonMobil and Chevron saw declines of roughly 10% in the first half of the year because of those challenges. Industrial giant General Electric has posted similar declines so far in 2017, largely because of its ill-timed foray into the oil and gas sector a few years ago.
The telecommunications sector has also performed poorly, falling prey to highly competitive conditions in the industry that have threatened even its most important companies. Verizon and AT&T have always been known for their attractive dividend yields, but the two wireless giants have had to fight against smaller carriers offering discounted prices for their services. So far, both companies haven't yet been able to convince customers completely that any superior quality is worth paying a premium subscription rate to get. With potentially costly upgrades to 5G networks looming, shareholders aren't certain whether profitability for the telecom giants will paint as attractive a picture as it has in the past.
Finally, even in some strong sectors of the market, Vanguard High Dividend Yield has been saddled with underperformers. Technology stocks have advanced more sharply in 2017 than most other sectors, but major ETF holdings Intel and IBM have both lost ground this year. The two tech giants share the challenge of keeping up with the times, adapting their long and successful business models to address new competition while still innovating to attract high-end customers. Investors haven't been satisfied with their efforts to date, and each will have to work harder to sustain and build their businesses going forward.
What's helping Vanguard High Dividend Yield?
Not all of Vanguard High Dividend Yield's stocks are doing badly. Global tobacco giant Philip Morris International jumped more than 30% in the first half of 2017, largely in response to more favorable performance in the foreign exchange markets that could finally stop pulling down its earnings. With key currencies like the euro and Japanese yen finally gaining ground against the U.S. dollar, Philip Morris could see the overseas revenue it collects translate into faster growth, and that prospect has investors excited about its immediate future.
Boeing has also produced gains of more than 30% for the ETF. The commercial aerospace industry has remained strong for years, and airline consolidation has led many carriers to make new orders to update their aircraft fleets and maximize efficiency. Boeing also stands to gain from increased defense spending from the U.S. government, and greater military revenue could provide a new leg up on what has already been an impressive rally for the aerospace giant.
Don't panic about six months
Short-term performance in any investment can be volatile, and investors shouldn't worry about the Vanguard High Dividend Yield ETF's underperformance compared to the broader S&P 500 during the first half of 2017. Over time, ups and downs in the fund's returns tend to even out and provide solid long-term performance to shareholders who follow a disciplined income investing strategy.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron and Intel. The Motley Fool has a disclosure policy.