Vanguard Dividend ETFs: A Comprehensive Guide

Vanguard Dividend ETFs are a popular choice for investors seeking regular income and long-term growth. They offer a diversified portfolio of dividend-paying stocks, providing a relatively stable source of income.

Vanguard offers several dividend-focused ETFs, each with its own unique characteristics. These ETFs are designed to track a specific dividend index, such as the S&P 500 Dividend Aristocrats.

One of the key benefits of Vanguard Dividend ETFs is their low cost. The expense ratio for most of these ETFs is around 0.06%, which is significantly lower than many other dividend-focused ETFs.

By investing in a Vanguard Dividend ETF, you can gain exposure to a broad range of dividend-paying stocks, including those in the consumer staples, healthcare, and utilities sectors. These sectors are often known for their stable cash flows and consistent dividend payments.

VIG has outperformed VYM over the past ten years, but both funds are suitable as income-producing assets in your portfolio.

Past performance is not indicative of future results, so it's essential to consider other factors when choosing between these two ETFs.

VIG has meaningfully outperformed VYM, largely due to its tech exposure, which currently stands at around 23% of its portfolio.

VYM, on the other hand, has a much lower tech allocation, typically hovering in the high single digits, which has led to it missing out on the post-pandemic mega-cap tech boom.

In recent years, performance has balanced out, with both ETFs producing similar results.

Both VIG and VYM have trailed the S&P 500, thanks to investors' preference for growth stocks over the past several years.

VYM's investment strategy is to calculate the forecasted dividend yield for every stock within its starting universe, take every stock within the top half and weight them by market cap.

It generates a diversified portfolio that produces a yield about double that of the S&P 500.

VYM seriously underweights tech, with only 12% of its portfolio allocated to the sector, compared to 31% for the S&P 500.

Given how well tech performed earlier in 2024, this has created a bit of a performance gap.

VYM's portfolio overweights several cyclical and defensive sectors, such as consumer staples, utilities, financials, energy, and industrials.

VIG's growth strategy has given it a significant performance advantage over other dividend growth strategies. The fund's ability to include emerging dividend payers, particularly those from the tech sector, has been a major factor in its success.

VIG has 23% of its assets invested in tech, a much higher percentage than NOBL, which has only 3% invested in the same sector. This is a key reason why VIG has been able to outperform other dividend growth strategies in recent years.

The market's favoritism of growth and tech over the past couple of years has played a significant role in VIG's outperformance. It's reasonable to expect that VIG will continue to outperform in the short term, although this won't last forever.

The performance of VYM and VIG has been a topic of interest for investors. VIG has outperformed VYM over the past ten years.

In fact, a daily updated chart comparing the two funds over ten years shows a divergence in performance since 2018. Past performance is not indicative of future results.

It's essential to consider the average annual performance records, which are available in the table above for three, five, and ten-year periods.

Voo has trailed the S&P 500 in recent years, largely due to investors' preference for growth stocks.

The S&P 500 has outperformed Voo thanks to the strong performance of growth stocks.

Voo's performance has been highly correlated with that of VIG and VYM, meaning they tend to underperform or outperform the S&P 500 together.

Historically, VIG has outperformed VYM, with a 23% allocation to tech contributing to its success.

VYM, on the other hand, has a high single-digit allocation to tech, which has resulted in underperformance compared to VIG.

VIG's more balanced approach, between Large Cap Value and Large Cap Blend, has helped it outperform VYM in recent years.

VYM's focus on Large Cap Value has been a liability, as value investing has struggled to gain momentum since the financial crisis.

The S&P 500's strong performance has been a major factor in Voo's trailing returns.

Dividend stocks are seen as a solid investment, especially for those seeking regular income in times of low interest rates, as they offer attractive yields.

Investing in high-dividend-yielding stocks means putting your money into profitable and established companies that can afford to pay out a significant portion of their earnings as dividends.

Dividend stocks can be a great option for investors looking for regular income, as they provide a relatively stable source of returns.

Let's take a closer look at the top ten holdings for two popular investment options: VYM and VIG.

The VYM top ten holdings as of January 1, 2025, are dominated by well-established companies like Broadcom Inc. and JPMorgan Chase & Co.

Broadcom Inc. holds the top spot with a weight of 0.03874 in the VYM portfolio.

JPMorgan Chase & Co. comes in second with a weight of 0.02866.

Exxon Mobil Corp. takes the third spot with a weight of 0.02304.

Home Depot Inc. and Procter & Gamble Co. follow closely behind, with weights of 0.0229 and 0.02173 respectively.

Here's a breakdown of the VYM top ten holdings:

Now, let's compare this to the VIG top ten holdings as of December 31, 2024. Apple Inc. takes the top spot with a weight of 0.04768.

Broadcom Inc. is also a top holding in the VIG portfolio, with a weight of 0.03876.

JPMorgan Chase & Co. and Microsoft Corp. follow closely behind, with weights of 0.03659 and 0.03615 respectively.

Exxon Mobil Corp. is also a top holding in the VIG portfolio, with a weight of 0.02723.

Here's a breakdown of the VIG top ten holdings:

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When considering global dividend ETFs in EUR, it's worth noting that Vanguard FTSE All-World High Dividend Yield UCITS ETF Distributing is the largest fund, with a staggering 4,748 million euros in size.

One of the key points is that this ETF is significantly larger than its competitors, with iShares STOXX Global Select Dividend 100 UCITS ETF (DE) coming in second with 2,596 million euros.

Here are the top three global dividend ETFs by fund size in EUR, ranked from largest to smallest:

It's worth noting that the size of a fund can be an important consideration for investors, as it may indicate the fund's stability and growth potential.

Vanguard ETFs are known for their low expense ratios, which can save you money in the long run. As of Jan. 2024, Vanguard ETFs' expense ratios range between 0.03% and 0.22%.

The average expense ratio for a typical Vanguard ETF is around 0.06%, which is significantly lower than the industry average of 0.24%. This can make a big difference in your investment returns over time.

The most expensive Vanguard ETFs tend to be those that invest overseas or have high turnover ratios. This means you'll pay more in fees for these types of ETFs.

On the other hand, the least expensive Vanguard ETFs tend to be those that specialize in corporate or Treasury bonds.

If you're a Vanguard investor who prefers mutual funds, you can consider the Vanguard High Dividend Yield Index Fund Admiral Shares (VHYAX) as an alternative to the VYM ETF.

The VYM twin fund has a higher expense ratio than the VYM ETF, with 0.08% vs 0.06% at last check.

The Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX) is the VIG twin fund, offering a similar investment option to VIG investors.

Mutual funds trade differently than ETFs, trading only at the market close.

ETFs, on the other hand, trade like stocks, with price changes throughout the day.

If you have an account with a trading app like Robinhood, you'd invest via ETFs instead of mutual funds.

Investors with an account at Vanguard may benefit from using the VHYAX and VDADX index funds.

Mutual funds are more hands-off, automatically reinvesting dividends and capital gains.

The Vanguard dividend ETFs track various indexes and benchmarks, each with its own unique characteristics. The VIG tracks the S&P U.S. Dividend Growers Index, which requires a minimum of 10 consecutive years of dividend growth and a market capitalization of $100+ million.

The VYM, on the other hand, tracks the FTSE High Dividend Yield Index, which includes stocks with the highest dividend yields. This index excludes REITs, which generally do not benefit from favorable tax rates on qualified dividends.

One of the key differences between VIG and VYM is the size and age of the indexes. VIG is larger and older, with a longer history of tracking dividend growth.

Here's a comparison of the benchmark indexes for VIG and VYM:

The FTSE All-World High Dividend Yield index is another popular benchmark, tracking high dividend stocks from developed and emerging economies worldwide. It selects the stocks with the highest dividend yields from its parent index, the FTSE All-World index, excluding REITs.

The S&P Global Dividend Aristocrats index aims at long-term and sustainable dividend growth, requiring a minimum of 10 consecutive years of a controlled dividend policy with rising or stable dividend payments.

The STOXX Global Select Dividend 100 index includes a selection of 100 companies from developed countries worldwide that meet criteria for high dividend quality, selecting stocks based on their indicated dividend yield and historical dividend policy.

These indexes and benchmarks provide a solid foundation for investors seeking regular income through dividend stocks. By understanding the characteristics of each index, investors can make informed decisions about which Vanguard dividend ETFs are best suited for their investment goals.

Vanguard dividend ETFs offer a range of strategies for investors, including a focus on income generation and long-term growth.

One key strategy is to invest in a diversified portfolio of high-quality dividend-paying stocks, as seen in the Vanguard Dividend Appreciation ETF (VDAIX), which tracks the Nasdaq U.S. Dividend Achievers Index.

For investors seeking a more income-focused approach, the Vanguard High Dividend Yield ETF (VYM) is a popular option, with a 3.1% dividend yield and a history of stable dividend payments.

By investing in a mix of these strategies, investors can create a balanced portfolio that generates regular income and has the potential for long-term growth.

Portfolio composition is a crucial aspect of investment strategies. The overlap between VIG and VYM, two popular dividend ETFs, is surprisingly high at 59%. This means that owning both funds together may not provide the diversification benefits you'd expect.

Investors seeking to pair these funds should be cautious, as a high overlap can mitigate the risk-reducing benefits of owning them together. In fact, a 40% overlap is a threshold beyond which diversification benefits become more minimal.

A comparison of sector allocations between VIG and VYM reveals some differences, which can give them distinct risk/return profiles. However, these differences are not as significant as you might think, given their high overlap.

Here's a breakdown of the sector allocations for VIG and VYM:

Note the stark contrast in tech exposure between VIG and VYM, with VIG having a much higher weight in tech. This can be beneficial in balancing out VYM's value and cyclical heavy exposures.

When choosing between a mutual fund and an index fund, it's essential to consider your investment goals and preferences.

Mutual funds offer flexibility in terms of investment options, allowing you to choose from a wide range of assets and asset classes.

Index funds, on the other hand, track a specific market index, such as the S&P 500, and offer a low-cost way to invest in the entire market.

The key difference between the two is that mutual funds are actively managed, meaning a fund manager makes decisions about which stocks to buy and sell, whereas index funds are passively managed, following a predetermined formula to track the market.

Ultimately, the decision between a mutual fund and an index fund depends on your investment goals and risk tolerance.

Factor Analysis is a crucial aspect of evaluating investment strategies. It helps us understand how different funds and ETFs are positioned in terms of various market factors.

The S&P 500 has very little tilt in any direction, as it's based on large-cap stocks. This means it's not heavily weighted towards any particular factor.

In contrast, dividend-focused ETFs like VIG, VYM, and DTD have minor negative tilts towards small-caps, which is expected given their focus on established companies.

VYM has a strong value tilt, but so does the dividend stock universe in general, which might be surprising. This could be due to the relative overexposure to the tech sector.

VIG, on the other hand, is pretty much right down the middle, suggesting a nice balance between growth and value.

All three dividend ETFs are over-exposed to more profitable companies, which isn't surprising given that companies generally have to be in good financial position to pay and grow their dividends over time.

Here's a summary of the factor differences between VIG and VYM:

Equity and Bond ETFs can be a great addition to your investment portfolio, but it's essential to understand how they work and how they'll be taxed.

ETFs owe their reputation for tax efficiency primarily to passively managed equity ETFs, which tend not to distribute a lot of capital gains.

Passively tracking an index means ETFs rebalance their holdings only when the underlying index changes, reducing the need for frequent capital gains distributions.

However, ETFs that hold dividend-paying stocks will distribute earnings to shareholders, usually once a year, and may be taxed as ordinary income.

Qualified dividends may be taxed at lower capital gains rates if certain conditions are met, but otherwise, you'll be taxed at the ordinary income rate.

Interest distributed by bond ETFs, often monthly, is also taxed as ordinary income.

If you sell an equity or bond ETF held for more than a year, you'll owe long-term capital gains taxes at a rate up to 23.8%, including the 3.8% Net Investment Income Tax (NIIT) on high earners.