The Stock Market is on an absolute tear right now. The S&P 500 is well over 4,400+ and is nearing new all-time highs. Dividend investing has been extremely hard, as stocks are seemingly overvalued and undervalued stocks are hard to come by.
Due to the increase in the overall S&P 500 and the stock market, it is a great time to reflect on current investment strategy and to determine the path forward. As you know, this will be a heavy Vanguard investment strategy discussion – do I continue forward or stop the presses?
My Vanguard (VYM) Strategy
For those that do not know, since last July of 2020, both my wife & I, we have been investing into 3 shares of Vanguard High Dividend Yield ETF (VYM) each and every week.
However, the S&P 500 hitting records doesn’t mean Vanguard’s VYM gets a pass…
In fact, VYM has also risen with the market, now over 29% since last August and up 20% year-to-date, as you’ll see in the charts below. At an estimated $3.00 dividend, the yield has also shrunk down to 2.77%.
Earlier during the week of August 9th, VYM has crossed over $108 per share for this exchange traded fund. Now, I love Vanguard and love staying invested in the market and never TIME the market.
However, the stock price is starting to get a little out of hand, don’t you think?
My wife and I have been diligence with our strategy, though. In fact, we have acquired (through the week of August 9th) 362 shares. Insane! Right? VYM is producing us well over $1,000 in forward, taxable dividend income.
The Price to Earnings (P/E) ratio is still showing 18x earnings, according to Vanguard’s VYM website itself.
Therefore, after accumulating over 360 shares, and a stock price that has burst through $100 per share, should we continue to invest into VYM each week? Do we change our dividend investing strategy?
Stock Price, Dividend Yield & Dividend Growth
In order to help me decide if I continue my Vanguard strategy – I am going to focus on the current stock price – specifically the price to earnings ratio and two other factors. The two other factors are dividend growth and dividend yield. The reasons are simple:
- I want to invest into income producing assets that show a sign of undervaluation.
- The income producing asset better grow that dividend at an above average rate.
- The yield better match with the dividend growth rate, as a good balancing act (i.e. 5% yield, with a 5% growth rate, 2% yield with an 8%+ growth rate)
Based on the image above, we know the price to earnings ratio (again – per the mouth of the horse) is 18x earnings. The S&P 500 is currently priced at over 30x current earnings, see the snip: 
Pretty expensive market, right? The dividend growth rate is approximately 7% with Vanguard’s High Dividend Yield ETF (VYM). That is right at the average growth rate for my dividend portfolio currently, which is approximately 7.29% currently. I’d like to keep that at least constant vs. decrease my overall growth rate. Seems like VYM would still make sure that will happen.
Time to check on the dividend yield. As I had stated earlier, the yield is approximately 2.77%. That pairs up decently well with ~7% growth rate to the dividend yield. The passive income stream will reinvest at 2.77% and should increase annually by at least 7%. I do need to note two pieces of information from 2021 thus far, with respect to the dividend.
First, the first quarter dividend was higher in 2021 vs the first quarter dividend in 2020 by 18%. That is phenomenal right? Well, not all quarters are consistent.
Secondly, the second quarter dividend was actually lower in 2021 vs the second quarter dividend in 2021 by 10%. Therefore, not consistent with the first quarter results.
What I need to see – the September or the third quarter dividend. I believe once I see that dividend growth rate, it should really steer my investment decision going forward.
Lastly, there is the other caveat. If the stock price continues to rise and the yield falls below 2.75%, I may have to change up the approach sooner than later, then. Decisions, decisions…
Conclusion – VYM Strategy
If VYM crosses $110 per share, that is when I will slow down my investing strategy into VYM. I may go down to two shares per week, for both my wife and me. That way, we can look for other opportunities, stay invested and continue to boost the dividend income forward.
At $110 per share, the dividend yield is approximately 2.72%. With a 7% dividend growth rate, that is almost a 10% dividend compound factor. However, I want it to be at least a 10% compound factor if I am dedicating this much hard earned & saved capital to an investment.
Further, the variable to the dividend announcement upcoming in September could play a HUGE part in this. If the dividend is incrementally bigger and the yield + growth becomes incrementally better, then the strategy continues forward.
What do you think on my investment strategy, approach and factors? Do you continue the investment with Vanguard, regardless? Do you pivot now or wait until September? Share your thoughts and feedback in the comments below. As always, good luck and happy investing!
-Lanny