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2 Excellent Vanguard Dividend-Oriented ETFs

Adam McCullough, CFA

Adam McCullough: Vanguard Dividend Appreciation ETF (VIG) and Vanguard High Dividend Yield ETF (VYM) are among the cheapest dividend-oriented funds available. VIG earns a Morningstar Analyst Rating of Gold while VYM earns a Morningstar Analyst Rating of Silver. The primary difference between the funds is that VIG targets dividend growth while VYM targets high-dividend yield.

VIG targets stocks that have raised dividend payments for at least 10 consecutive years and applies a profitability screen to avoid stocks that may be at risk of cutting their dividend payment. To further mitigate risk, VIG weights its holdings by their market capitalization and caps single stock weightings to 4% of the portfolio.

On the other hand, VYM targets the highest-yielding half of U.S. stocks. Like VIG, it market-cap-weights its holdings and reduces its risk by owning a broadly diversified portfolio. VYM holds about 400 names compared to VIG's 180 holdings.

As of Dec. 31, 2017, VYM’s dividend yield measured 3.0% compared to 1.9% for VIG. But don't be too put off by VIG's lower dividend yield. This fund earns a Morningstar Analyst Rating one notch above that of VYM because of its risk-mitigation approach.

For example, VIG dropped ConocoPhillips stock from its portfolio before ConocoPhillips cut its dividend payment in early 2016, presumably because it didn't pass VIG's profitability screen, while VYM still owned ConocoPhillips through its dividend cut. VIG's higher quality portfolio helped during the bear market from October 2007 to March 2009. VIG lost 46% over this time period while VYM experienced a 57% drawdown.

Both funds are excellent choices for investors seeking dividend-oriented strategies. Informed investors will understand that the primary difference between both funds is how they balance the trade-off between dividend yield and risk.