Vanguard International High Dividend Yield ETF Could Outperform U.S. Stocks Over Next Decade

For years, U.S. stocks-especially large-cap technology names-have dominated global equity returns, leading many American investors to question the need for international diversification. Yet recent research from Vanguard points to a possible shift: developed-market international stocks may deliver stronger returns than their U.S. counterparts over the next decade. This outlook is prompting some investors to reconsider their portfolio mix, particularly those concerned about high valuations in the U.S. tech sector and seeking more consistent dividend income.

The Vanguard International High Dividend Yield ETF (VYMI) is one fund drawing attention in this context. VYMI invests primarily in high-dividend stocks from developed markets such as Japan, the United Kingdom, Canada, Switzerland, and Australia, with additional exposure to emerging markets. The fund holds over 1,500 stocks across 45 countries, with its largest allocations in Europe and the Pacific region. Its top holdings include HSBC Holdings, Novartis, Roche Holding AG, Mitsubishi UFJ Financial Group, Royal Bank of Canada, Toronto-Dominion Bank, and BHP Group. For investors seeking steady income, VYMI's trailing 12-month dividend yield stands at 3.68%, which is notably higher than many U.S.-focused dividend funds.

Comparing U.S. and International Performance

While U.S. stocks have outperformed most international markets over the past decade, the gap has narrowed in recent years. Over the last five years, VYMI has delivered an annualized return of 12.7%, outpacing the S&P 500 index and the Vanguard S&P 500 ETF (VOO) during that period. However, over a 10-year horizon, VYMI's annualized return of 10.8% still trails VOO's 15.5%. This divergence highlights the cyclical nature of global equity leadership and the importance of time horizon when evaluating performance.

Valuation is another factor drawing investors to international stocks. As of the latest data, VYMI trades at a price-to-earnings (P/E) ratio of 14.7, representing a significant discount to the S&P 500's P/E of 25.2. Lower valuations may offer a margin of safety and the potential for higher future returns, especially if U.S. tech stocks experience a period of slower growth or increased volatility.

Portfolio Diversification and Risk

Adding international high-dividend stocks can help diversify a portfolio that is heavily weighted toward U.S. large-cap growth. VYMI's broad exposure across sectors and regions reduces reliance on any single market or industry. For investors concerned about concentration risk in U.S. technology stocks-which now account for nearly 40% of the S&P 500 by market capitalization-international dividend funds may provide a useful counterbalance.

It's important to recognize that international investing comes with its own set of risks, including currency fluctuations, geopolitical uncertainty, and differences in regulatory environments. Dividend yields abroad can also be affected by local tax policies and economic cycles. Investors should weigh these factors alongside their income needs, risk tolerance, and long-term goals.

Expense Ratios and Fund Structure

Cost remains a key consideration for ETF investors. VYMI's expense ratio is 0.22%, higher than the ultra-low 0.03% charged by VOO, but still competitive for a globally diversified fund. The fund's structure-tracking a broad index of high-yielding international stocks-means it is passively managed, with holdings updated periodically to reflect changes in the underlying index.

For those interested in growth-oriented strategies, funds like the Vanguard Russell 1000 Growth ETF have also attracted attention. As discussed in a recent analysis on how regular contributions to a growth ETF can compound over decades, long-term investing in diversified funds can produce substantial results, though outcomes depend on market conditions and investor discipline.

According to Vanguard's 2024 outlook, developed-market international equities are projected to return between 7% and 9% annually over the next decade, compared to 4% to 6% for U.S. equities. These forecasts are not guarantees, but they reflect current valuations, earnings growth expectations, and macroeconomic trends. Investors should review their asset allocation periodically and consider whether their portfolios are positioned for a range of possible outcomes.

Understanding Dividend Yield and Valuation

Dividend yield measures the annual income an investor receives from a stock or fund as a percentage of its price. High dividend yields can be attractive, but they may also signal underlying risks, such as slower growth or sector-specific challenges. In the case of VYMI, the yield is supported by a diversified mix of established companies with stable cash flows, but investors should monitor for changes in payout policies or economic headwinds that could affect distributions.

Valuation metrics like the price-to-earnings ratio help investors assess whether a fund or stock is expensive relative to its earnings. Lower P/E ratios may indicate better value, but they can also reflect lower growth prospects or higher perceived risk. Balancing yield, valuation, and growth potential is a central challenge for investors building a diversified portfolio.

International ETFs such as VYMI offer U.S. investors a way to access global markets, diversify income sources, and potentially benefit from valuation gaps. Yet, as with any investment, the suitability of international dividend funds depends on individual goals, risk tolerance, and time horizon. Investors should consider how these funds fit within their broader financial plans and remain mindful of the unique risks and opportunities presented by global markets.