The 2 Best High-Yield Energy Stocks in Vanguard High Dividend Yield ETF

Vanguard High Dividend Yield ETF (NYSEMKT: VYM) is an interesting exchange-traded fund (ETF). With a yield of just 2.5%, it probably won't excite many dividend investors. However, the index approach here leads to a massively diverse portfolio, with over 560 holdings.

While you may not want to buy the ETF, you might want to consider it as a tool for selecting high-yield stocks. Here are two good ones in the energy patch to look at today.

What does Vanguard High Dividend Yield ETF do?

Essentially, Vanguard High Dividend Yield ETF selects all U.S. stocks that pay dividends and ranks them by yield. Then it selects the highest yielding 50% of the index, weighting the holdings by market cap. It's a pretty simple approach that is very clearly focused on buying high-yield stocks. And while the 2.5% yield isn't exciting on an absolute basis, it is still roughly twice the level of the S&P 500.

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All in, the Vanguard High Dividend Yield ETF achieves its goal while providing investors with significant diversification. It's a solid pick if you are looking for a dividend-focused alternative to an S&P 500 index fund. However, there's another way to view Vanguard High Dividend Yield ETF. If the yield isn't high enough for you, you can still use it to find high-yield stocks just by looking at its holdings.

If you are considering an energy investment, two of the top holdings in the ETF today are ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX). ExxonMobil is a top-10 holding, and Chevron is just shy of that at number 11 on the list. Both of these high-yield giants are worth a deep dive.

The benefits of owning ExxonMobil and Chevron

ExxonMobil and Chevron are both large companies on an absolute basis, and within the energy sector, each offering impressive scale and reach. However, the key here is that they are integrated energy companies, which means their businesses span from the upstream (oil and gas production) through the midstream (pipelines) and all the way into the downstream (chemicals and refining). Energy prices are highly volatile; having exposure to the entire energy value chain helps to soften the earnings swings that you will often face with an energy investment.

Additionally, ExxonMobil and Chevron have the strongest balance sheets among their peers. ExxonMobil's debt-to-equity ratio is a very low 0.16x, while Chevron's is only slightly higher at 0.22x. Those would be low ratios for any company, but they offer an important release valve for ExxonMobil and Chevron. Essentially, these two industry giants can add debt during industry downturns to support their businesses and dividends. When oil prices recover, as they always have historically, the debt is reduced in preparation for the next downturn.

That brings the story to the dividend. ExxonMobil has increased its dividend annually for 43 consecutive years. Chevron's streak has lasted 38 years. That's an incredible amount of consistency in what is a highly volatile sector. ExxonMobil's dividend yield is nearly 3.6% while Chevron's yield is 4.5%. They are very similar businesses, so either one would likely be a solid choice. However, if you are focused on maximizing income, Chevron is the clear standout.

You could do this with any industry

This is an example of how you could use the Vanguard High Dividend Yield ETF to find an energy investment. Industry giants ExxonMobil and Chevron are indeed great investment options for long-term dividend investors. They have proven their ability to survive and thrive throughout the entire energy cycle, rewarding investors with attractive dividends along the way.

However, you shouldn't stop with energy because you can find investment opportunities in just about every sector inside of Vanguard High Dividend Yield ETF. Even if you don't buy the ETF, you can still use it as a tool.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.