Strategies and risks in income investing and dividend ETFs

Investors often favor income investing strategies, such as focusing on dividends and interest, to provide psychological comfort and a sense of preserving principal. However, strict adherence to income-only strategies can lead to significant opportunity costs, as many high-growth companies historically reinvested earnings rather than paying dividends.

To mitigate the risks of selecting individual stocks based solely on high yields—which can lead to portfolios with poor balance sheets or shrinking stock prices—diversified exchange-traded funds (ETFs) are often recommended. The Vanguard High Dividend Yield ETF (VYM) is cited as an example of a strategy that targets above-average yields through the FTSE High Dividend Yield Index. By including hundreds of stocks, such as the more than 600 in VYM, investors can capture higher income while maintaining diversification and long-term growth potential.