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.
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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.
Prefer video? Watch it here:
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. VIG has a mutual fund equivalent VDADX.
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. VYM has a mutual fund equivalent VHYAX.
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 primary difference is that VIG has a dividend growth requirement of 10 consecutive years, while DGRO requires only 5 consecutive years. I compared VIG and DGRO in more detail in a separate post here.
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. I delved into more details of this specific comparison in a separate post here.
Basically, as we might expect, compared to both VYM and VIG, SCHD has more loading on the Profitability factor but less loading on the Size and Value factors:
VIG vs. VYM – Composition
|Oil & Gas
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 has suffered over the backtested time period. In short, if one wants to utilize these funds, 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.
So are VIG and VYM good investments? Maybe. 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 risk factors of Value, Quality, and Low Volatility, so you may be better off simply investing in products that specifically target those factors.
Conveniently, all these funds should be available at any broker, including M1 Finance, which is the one I'm usually suggesting around here.
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, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment 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. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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