If you are looking for conservative exposure to dividend stocks in your portfolio, the Vanguard Dividend Appreciation ETF(NYSEMKT: VIG) and the Vanguard High Dividend Yield ETF(NYSEMKT:VYM) It’s probably appeared on your radar at some point.
And for good reason. They are among the largest dividend ETFs in the world. They have very low expense ratios. They have a solid long-term track record. In short, either would make an excellent core portfolio.
But they are very different. VIG targets dividend producers. VYM chases high-yield stocks. They work well together because their compositions tend to be quite different. But what if you want to have just one? Does the current environment favor one over the other?
Let’s put the Vanguard Dividend Appreciation ETF and the Vanguard High Dividend Yield ETF side by side to see which comes out on top.
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VIG tracks the performance of the S&P US Dividend Growers Index. Targets stocks of companies that have increased their dividend payments over the past 10 years, while excluding the top 25% of companies based on the indicated annual dividend yield.
His strategy of considering prospective returns and eliminating high performers helps avoid some of the performance traps that could hurt overall performance. However, its market cap weighting methodology gives greater weight to larger companies, not those with better dividend histories.
VYM tracks the performance of the FTSE High Dividend Yield Index. Includes companies whose expected dividend payments are above average. Real estate investment trusts (REITs) are excluded.
Because you use a large initial universe, selecting the top half of returns dilutes your exposure as a pure high-yield. The fact that it also weights the portfolio by market capitalization means that there is even less emphasis on the performance aspect of the portfolio.
In true avant-garde style, both ETFs are extremely cheap. VIG and VYM’s expense ratios of 0.05% and 0.06%, respectively, are among the lowest in the dividend ETF space.
VYM, as expected, has substantially higher performance. Its 2.4% yield beats VIG’s more modest 1.6% by a fairly wide margin. From a pure income generation standpoint, the Vanguard High Dividend Yield ETF comes out on top.
Size and marketability are not issues for any of the ETFs. VIG has $102 billion in assets under management (AUM), while VYM has approximately $69 billion. Both are traded heavily and trading spreads are very tight.
You might think that a portfolio aimed at long-term dividend producers would include more mature and defensive companies. However, the Vanguard Dividend Appreciation ETF’s construction methodology actually gives it a greater bias toward growth.
VIG’s top sector holdings are technology (27.8%), finance (21.4%) and healthcare (16.7%). The high allocation to technology is unusual among dividend ETFs, but the cap-weighting strategy helps make Broadcom, microsoftand Apple the three main holdings. Not exactly your traditional dividend portfolio.
VYM’s main sector holdings are financial (21%), technology (14.3%) and industrial (12.9%). In reality, it is more diversified: seven sectors receive allocations of at least 8%. Cap weighting also has an impact here, with Broadcom, JPMorgan Chaseand ExxonMobil occupying the first three positions. But at least it’s more like a traditional dividend fund.
Over the past month, the tech rally has begun to lose steam. Cyclical stocks have started to outperform, and that is the sweet spot where VYM typically invests. The tech overweight, which had been serving VIG well, has become something of an anchor since early November.
If the economy continues to slow and the labor market weakens further, it stands to reason that value stocks might hold up better. That increasingly looks like the direction the U.S. economy is taking. The unemployment rate rose to 4.6% in November, its highest level in more than four years, and job growth has stalled. Given what we know about affordability and price pressures, risk sentiment could deteriorate in 2026.
If that happens, VYM’s portfolio, which is around 20% cheaper on a price-to-earnings basis than VIG’s, could be poised to outperform.
I prefer the Vanguard High Dividend Yield ETF to the Vanguard Dividend Appreciation ETF right now.
VIG’s tech overweight could become problematic if investor confidence weakens and valuations decline. The problems in the labor market are getting worse and I hope that VYM’s value-oriented nature will allow it to achieve better results.
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JPMorgan Chase is an advertising partner of Motley Fool Money. David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool holds positions in and recommends Apple, JPMorgan Chase, Microsoft, Vanguard Dividend Appreciation ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom and recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
VIG vs. VYM: Which Vanguard Dividend ETF is the Best Buy? was originally published by The Motley Fool
