Not Sure What High-Yield Stocks to Buy in 2025? Vanguard High Dividend ETF Has You Covered.

When I was running marathons I would remind myself (somewhere around mile 20) that if it were easy to run 26.2 miles everyone would do it. But everyone doesn't run marathons because it is very, very hard. Investing is kind of like a marathon. But unlike marathons, there are some legit shortcuts you can take when you invest. For dividend investors, one of the easiest shortcuts is the Vanguard High Dividend ETF (NYSEMKT: VYM). Here's what you need to know.

Which stock is the right one to buy?

Picking individual stocks is a highly individualized thing. What works for me might not work for you. That issue exists at a high level, for example the choice between growth investing and dividend investing, and at the low level, such as choosing between Coca-Cola (NYSE: KO) and PepsiCo (NASDAQ: PEP) (I chose PepsiCo, in case you were wondering). There are so many moving parts that, frankly, investing is a pretty daunting task.

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Some people are so overwhelmed that they just give up. That's not a great outcome, and the advent of exchange-traded funds (ETFs) has massively changed the investing landscape. Now with a single small purchase (or a big one, if you want and have the cash), you can build a portfolio that is suited to your personal approach. Dividend investors looking at the thousands of dividend-paying stocks available might want to make the Vanguard High Dividend ETF a foundational investment in 2025.

What does the Vanguard High Dividend ETF do?

At its core, the Vanguard High Dividend ETF is very simple to understand. First it looks at all U.S. stocks and selects those that pay dividends. Then it ranks stocks by dividend yield from highest to lowest. Finally, it selects the 50% of the group with the highest yields. The stocks are weighted by market cap, so the largest companies have the biggest impact on performance. The expense ratio is an itty-bitty 0.06%, so not only is the ETF easy to understand, but it is also cheap to own.

That said, there is one caveat. This approach leads to a very large portfolio, with the Vanguard High Dividend ETF owning roughly 500 stocks. That's about the same number as the S&P 500 index. Having so many stocks means that the ETF has to reach rather far down on the yield spectrum, so the average dividend yield probably won't blow you away. Indeed, at 2.7% it's not likely to excite anyone. However, the S&P 500 index's yield is an even less impressive 1.2%. So, by comparison, the Vanguard High Dividend ETF is still an attractive yield option.

VYM data by YCharts

The real attraction, however, is on the diversification front. With so many stocks in the portfolio, no single holding is likely to make or break the ETF's performance. Yes, market cap weighting means that the largest stocks are more important than the smaller ones. But the largest holding is only around 4% of the portfolio. All in, you could easily use this as the foundation of your income portfolio.

There are limitations and opportunities here

If you are trying to maximize the income your portfolio generates, the Vanguard High Dividend ETF probably won't be enough. The yield just isn't that high. However, if you are looking at your portfolio as 2025 gets underway and don't know what dividend stocks to buy, it is a good core choice for building your portfolio since it basically buys all of the high-yield stocks out there.

It could easily start as a place to put cash so it continues to work for you in the market as you transition that money into other, higher-yielding investments. Effectively this approach buys you time to do the hard work of investing without feeling like you are "out of the market" and missing out (FOMO is a powerful emotional issue to consider). But the Vanguard High Dividend ETF could also be a core holding that always gets a certain allocation of your assets while the rest is spread across more aggressive investments with higher yields. This core and explore approach will allow you to find the balance between the risk you take on with more focused high-yield investments and your ability to sleep well at night.

No matter how you use the Vanguard High Dividend ETF, it will ensure that you own the broadest spectrum of high-yield stocks as possible in 2025... and beyond. Not bad for a tiny 0.06% expense ratio.

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Reuben Gregg Brewer has positions in PepsiCo. The Motley Fool has positions in and recommends Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.