Financially reviewed by Patrick Flood, CFA.
Two of the most popular dividend-oriented ETF’s are the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (VYM). Let’s compare them.
To be clear, I don’t obsess over dividends. But it’s impossible to avoid seeing and hearing about dividend investors’ preferences of dividend-focused ETF’s. Dividend investors seem to use these two funds interchangeably, perhaps not realizing they are two fundamentally different things. Here we’ll review these ETFs and explore the nuances between them.
In a hurry? Here are the highlights:
- VIG and VYM are two popular dividend-oriented ETF’s from Vanguard.
- VIG is comprised of dividend growth stocks – companies with a historically increasing dividend of at least 10 consecutive years, excluding REITs.
- VYM is comprised of higher-than-average-dividend-yield stocks, excluding REITs.
- Since their inception in 2006, VIG has handily beaten VYM on every notable metric.
- VYM has underperformed the S&P 500 index historically.
- Vanguard themselves concluded that the performance of the stocks within VIG and VYM was fully explained by their exposure to the known equity factors of Value, Quality, and Low Volatility.
VIG vs. VYM – Methodology
As the name implies, the Vanguard Dividend Appreciation ETF (VIG) is comprised of dividend growth stocks – companies with a history of an increasing dividend over time. Specifically, VIG tracks the NASDAQ US Dividend Achievers Select Index, formerly known as the Dividend Achievers Select Index. This index was created in 2006, and is comprised of companies with at least 10 consecutive years of an increasing dividend payment.
The Vanguard High Dividend Yield ETF (VYM) seeks to track the FTSE® High Dividend Yield Index. Constituent stocks are selected from the FTSE® All-World Index, excluding REITs, and ranked by forecasted dividend yield.
VIG vs. DGRO
While we’re at it, we can compare Vanguard’s VIG to the iShares Core Dividend Growth ETF (DGRO). They are very similar. The only real difference is that VIG has a dividend growth requirement of 10 consecutive years, while DGRO requires only 5 consecutive years.
As such, we would expect DGRO to be slightly more volatile than VIG, and indeed it has been since inception:
Specifically, at the time of writing, VIG has more exposure to the Quality/Profitability and Investment factors, and DGRO has slightly more exposure to market beta:
SCHD vs. VYM
Another popular comparison is SCHD and VYM. SCHD is the Schwab U.S. Dividend Equity ETF. It tracks the Dow Jones U.S. Dividend 100™ Index. This index is comprised of 100 stocks with at least 10 consecutive years of dividend payments and a minimum market cap of $500 million. Stocks are then selected for the index by screening for high yield, profitability metrics, and 5-year dividend growth. SCHD is similar to DGRO in that regard.
As we might expect based on this selection methodology, compared to both VYM and VIG, SCHD has more loading on the Profitability factor but less loading on the Size and Value factors:
SCHD has more exposure to large-cap stocks and less exposure to small- and mid-cap stocks. Because of this, I’d be more likely to use VIG and/or VYM over SCHD.
VIG vs. VYM – Composition
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Notice VYM’s larger weighting to Consumer Goods, Financials, Telecom, and Utilities. These are sectors notorious for relatively high dividend yields, but not necessarily a growing dividend over long time periods.
VIG vs. VYM – Performance Backtest
Typical of Vanguard funds, both VIG and VYM have sufficient AUM and trading volume and low expense ratios; I’m ignoring those quick facts on these since they’re largely similar. Yield chasers will of course note that VYM – being focused on high yield per se – has a considerably higher dividend yield than VIG. I would encourage you to ignore that fact and instead focus on the fundamental mechanics and historical performance:
In short, VIG has handily beaten VYM on every metric since inception – higher return, lower volatility, smaller drawdowns, and considerably higher risk-adjusted return (Sharpe). Over that same time period, VYM also underperformed an S&P 500 index.
Of course, when you stop and think about the underlying fundamentals, we should probably expect VIG to beat VYM – dividend growth companies tend to be more stable and less volatile, and have strong profitability. Specifically, VIG has more loading on the Quality/Profitability factor than VYM. Simultaneously, we know that in some cases, a high dividend yield can actually be a signal of an unstable company. In fairness, VYM also has comparatively more loading on Value than VIG, and the Value factor suffered over the backtested time period. In short, it’s likely wise to just utilize both VIG and VYM (and VIGI and VYMI for international), as they are two different funds. I created a dividend-focused portfolio that incorporates both of these funds that can be found here.
But here’s the kicker. Vanguard themselves investigated the strategies contained in VYM and VIG and concluded that their constituent stocks’ performance was fully explained by their exposure to the known equity factors of Value, Quality, and Low Volatility, so you may be better off simply investing in products that specifically target those factors.
Do you hold any of these ETFs in your portfolio? Let me know in the comments.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.