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The Path Is Clear, The Walk Is Hard (Part 2)

Stay diversified, stay disciplined, and let the market work for you.

14.01.2021

In part 1, we discussed the difficulties in beating the market and started looking at ways to shape a portfolio.

To safeguard against these risks of high dividend yields tend to be a sign of trouble, it’s best to stick to broadly diversified dividend funds, where a few bad apples won’t significantly affect the portfolio. An example is the Vanguard High Dividend Yield ETF (VYM, U.S.-listed). This fund sweeps in stocks representing the higher-yielding half of the U.S. dividend-paying market.

It’s also effective to select funds that screen for both quality and yield, like Schwab U.S. Dividend Equity ETF (SCHD, U.S.-listed). This fund has a more compact portfolio than VYM, but it keeps risk in check by screening for stocks with high return on equity, dividend growth, strong cash flow/debt, and high yields. Both funds further mitigate risk by weighting their holdings by market cap, which causes stocks with weakening fundamentals to become a smaller part of these portfolios as their prices decline.

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