Inheriting 500K? Understanding Vanguard High Dividend Yield Index Fund (VHDYX) for Income and Growth

Recently, you've found yourself in an unexpected situation, inheriting 500,000. Your next question is how to best invest this amount. One potential investment is the Vanguard High Dividend Yield Index Fund (VHDYX). This article will explore the expected annual income and growth from investing in VHDYX, the potential risks, and alternative investment options.

Current Yield and Income

The current yield of VHDYX is around 3%. This means, based on your inheritance, you can anticipate an annual income of approximately $15,000 (500,000 * 0.03). It's important to note that this 3% yield is your primary source of income for the short to medium term.

Long-Term Growth Expectations

Over the long term, the primary determinant of growth will be the earnings growth of the companies in the fund. Assuming an average earnings growth rate of 5%, you could estimate a total return of around 8% annually, again assuming reinvestment of dividends. This figure aligns closely with historical long-term averages for U.S. companies.

Market Risks and Historical Performance

It's crucial to consider potential market risks, especially in volatile economic times. In 2008, VHDYX lost 33%, which was still better than the 37% loss experienced by the Vanguard 500 Index Fund (VFINX). However, it's equally important to recall that if you invested in VFINX near its peak in 2000, it would have taken several years to recover.

Experts suggest that during the period from 2000 to 2015, VFINX returned an average of about 5% annually. Given the types of stocks the VHDYX fund owns, some might have performed better during that challenging period. Therefore, it's wise to consider a range of both positive and negative performance scenarios.

Long-Term Investment Strategy

Over the long term, the likelihood of losing money decreases. Historically, a stock fund like VHDYX should at least match the rate of inflation, or potentially grow by 10% per year if you're fortunate, assuming reinvestment of dividends.

Expert Recommendations and Diversification

Some, including the author of this article, suggest diversifying your investment portfolio. For example, you might consider Vanguard LifeStrategy funds like LifeStrategy Moderate Growth or Conservative Growth. T. Rowe Price also offers similar funds called Personal Strategy funds, which provide a diversified portfolio of bonds, growth stocks, dividend stocks, small-caps, and foreign stocks.

These funds can potentially save you money on managing an adviser, making them a cost-effective option. The article also mentions the personal experience of one of the author's investments, where they own the ETF version of VHDYX (symbol VYM) as part of a fully diversified portfolio.

Conclusion

While VHDYX is a solid choice for income and long-term growth, it's essential to recognize the potential risks. Diversification and professional advice can further enhance your investment strategy and potentially protect against market volatility.