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Better Buy: Vanguard Dividend Appreciation ETF vs. Vanguard High Dividend Yield ETF

By Dan Caplinger - May 19, 2018 at 11:56AM

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Which of these dividend ETFs is a smarter pick right now? Find out here.

Dividend stocks are more popular than ever, and exchange-traded funds that let you buy a host of great dividend stocks in a single package have gotten a lot of attention lately. There are two ETFs from the Vanguard Group that have been in especially high demand, as both Vanguard Dividend Appreciation ETF (VIG -0.50%) and Vanguard High Dividend Yield ETF (VYM -1.15%) cater to dividend investors.

Yet even though both of these ETFs have the word dividend in their names, they each have a vastly different methodology in choosing which stocks they own. Dividend investors want to know which of these dividend ETFs does the better job of generating both income and total return. With that in mind, a deeper look at the two Vanguard ETFs will give some insight about which one makes more sense for your portfolio.

Vanguard logo showing ship and red lettering for corporate name.

Image source: Vanguard Group.

Valuation and stock performance

Both Vanguard High Dividend Yield and Vanguard Dividend Appreciation have done reasonably well recently. Vanguard Dividend Appreciation has fared slightly better, with a 12% gain, but High Dividend Yield's 9% rise isn't far behind. The rankings reverse when you look back five years, but the difference is narrow at just 70% to 65%.

Looking at valuations, it's interesting to see that the stocks in the High Dividend Yield ETF's portfolio tend to have a significantly cheaper earnings-based valuation than Dividend Appreciation's holdings. The current figures are a trailing multiple of 18 for High Dividend Yield, compared to 23 for Dividend Appreciation. That gives the nod to High Dividend Yield as potentially having less risk within its portfolio.

Dividend income

High Dividend Yield lives up to its name by paying a much greater dividend yield to its shareholders than Dividend Appreciation does. Currently, High Dividend Yield's SEC-defined dividend yield is 3.1%, compared to just 2% for its sister ETF.

You'd expect greater appreciation in dividend payouts from the Dividend Appreciation ETF, but that turns out not to be the case. High Dividend Yield has seen its total annual distributions rise more than 25% between 2014 and 2017. By contrast, Dividend Appreciation has seen only a 21% gain in distributions over that time frame, including an unusually flat performance between 2015 and 2016. That's consistent with longer-term trends, making High Dividend Yield a clear choice on this metric.

Growth and potential risk

The big difference between these two Vanguard ETFs shows up when you look at their holdings. For High Dividend Yield, it's been surprising to see how technology stocks have taken the lead, a move that has definitely helped performance given the tech sector's dominance in recent years. You'll find a much more balanced exposure to industries across the economy, with 10% or more allocations to six different sectors, including tech, financials, healthcare, industrials, consumer goods, and energy. Now that key industries like banking and oil and gas exploration and production have shown signs of recovering and accelerating their gains, High Dividend Yield could see share-price gains to go along with dividend payments, and that's a powerful combination for investors of all kinds.

Dividend Appreciation has much more concentrated bets. Industrial stocks currently make up nearly a third of the portfolio, and consumer goods and services stocks add another 30%. Tech exposure is much lower, and the ETF currently sports no oil and gas holdings whatsoever. In general, you'll find within Dividend Appreciation's portfolio many of the stalwart blue chip stocks you'd expect from a dividend ETF, but their heightened valuations at the moment could serve to hold them back in the future. That introduces a risk that most dividend investors aren't used to seeing, but it's definitely worth keeping an eye on going forward.

The right dividend ETF

Looking at these features, Vanguard High Dividend Yield seems to be in a better position to offer top performance. With generally cheaper stocks with equal or better growth characteristics, the ETF is likely to best Vanguard Dividend Appreciation over the long run from here.

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Stocks Mentioned

Vanguard Specialized Funds - Vanguard Dividend Appreciation ETF Stock Quote
Vanguard Specialized Funds - Vanguard Dividend Appreciation ETF
$144.12 (-0.50%) $0.72
Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF Stock Quote
Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF
$101.55 (-1.15%) $-1.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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