Income investors love dividend stocks, and the easiest way to invest in a diversified portfolio of dividend stocks is through specialized exchange-traded funds. The Vanguard High Dividend Yield ETF (VYM +0.43%) has become a leader in the dividend ETF universe, using its low-cost reputation to attract a substantial asset base. The WisdomTree U.S. High Dividend ETF (DHS 0.05%), however, has taken a different approach toward dividend investing, which can result in different share-price behavior and returns over time. To help you decide which of these dividend ETFs better meets your needs, let's take a closer look at how they match up right now on some key measures.
Valuation and recent performance
Both Vanguard High Dividend Yield and WisdomTree U.S. High Dividend have seen good gains during 2017, although they've both lagged the broader stock market. Over the past year, the Vanguard ETF is up 17%, compared to a 12% rise for the WisdomTree fund. In the past five years, High Dividend Yield enjoys a 14.8% to 13.1% average annual return advantage.
VYM total return price data by YCharts.
From a valuation standpoint, the stocks that the two dividend ETFs own are almost identically priced compared to their prospective earnings. Both ETFs have a forward earnings multiple of about 20, according to Morningstar. That puts the dividend ETFs at a slightly higher valuation than the rest of the market, showing the strong appetite that income investors have for dividend stocks currently.
Dividend income
Both dividend ETFs do a good job of producing income for their shareholders, but the WisdomTree ETF carries a slight advantage in this regard. Its current yield as defined by the Securities and Exchange Commission is 3.26%, compared to 2.86% for Vanguard High Dividend Yield.
Dividend growth for both ETFs has been roughly comparable, although here, Vanguard has the small edge. Distributions for 2017 are likely to come in about 37% higher for the Vanguard ETF than what it paid out in 2013, compared to just a 24% rise for the WisdomTree ETF.
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Growth, risk, and methodology
Given that both dividend ETFs have similar goals, you'd expect them to have many of the same growth prospects and risks. That's largely true, but subtle differences in the methodologies behind the indexes that each ETF tracks lead to different holdings and overall fund behavior.
The Vanguard ETF holds 400 stocks, with the idea of including shares of stocks that have above-average dividend yields. That gives the ETF a very broad exposure to the market, with fairly substantial holdings in the technology sector, which has performed quite well during 2017. Strength in financial services, healthcare, and industrials has also rewarded the Vanguard ETF.
By contrast, the WisdomTree ETF's methodology chooses the stocks in the highest 30% of the market by dividend yield. The ETF is also dividend weighted, meaning that the companies that pay the largest aggregate dollar amount in dividends have the largest positions within the fund. WisdomTree's ETF also holds more than 400 stocks, sharing several of the same top holdings as Vanguard but with some notable substitutions and omissions. From a sector perspective, WisdomTree puts greater emphasis on real estate, energy, and consumer defensive names, with smaller allocations to technology than the Vanguard fund.
Which dividend ETF is right for you?
Based on these factors, the Vanguard High Dividend Yield ETF comes out on top, with stronger returns supported by a cheaper cost structure than the WisdomTree ETF. That's no guarantee that WisdomTree's different methodology won't turn things around and produce better returns in 2018, but it does give a slight advantage to Vanguard's fund in the dividend ETF space.
