High Yield and Dividend Appreciation Investing with Vanguard's Low-Cost Dividend ETFs

Published Wed, 30 Oct 2013 09:30 CET

Depending on their investment profile, dividend-focused investors generally tend to pursue either the high-dividend yield investment strategy, focused on maximizing current dividend income, or the dividend-growth investment strategy, focused on growing dividends and maximizing total returns over time. Each strategy has its own merits, and there is empirical evidence that supports both investment paths. For instance, O’Shaughnessy Asset Management, LLC finds that “high dividend yields are a strong indicator of future outperformance”. Its research found that “in 80+ years –from 1930 to the end of 2011– the top decile of stocks by dividend yield and dividend growth returned 11.6% and 8.1%, respectively. During the same period, the top decile by dividend yield handily beat U.S. All Stocks by 1.4 percent annualized, whereas the top decile of dividend growers underperformed annually by 2.1 percent”. On the contrary, analyzing data going back to 1977, Ned Davis Research found that dividend growers tended to outperform stocks boasting high yields.

Whichever the dividend-focused investment strategy, Vanguard, the world’s largest mutual fund company and a leader in dividend ETFs, has a low-cost ETF option. With expense ratios that, on average, are 91% lower than industry averages, Vanguard offers the high-yield dividend ETF, the Vanguard High Dividend Yield ETF (NYSE: VYM) and the dividend-growth focused ETF, the Vanguard Dividend Appreciation ETF (NYSE: VIG). Both ETFs sport small annual expense ratios of only 0.10%.

Vanguard's Low-Cost Dividend ETFs 3 Year Total Returns Graph

The Vanguard High Dividend Yield ETF is an investment vehicle for dividend investors seeking to maximize current dividend income. The fund tracks the price and yield performance of the FTSE® High Dividend Yield Index, which measures the performance of U.S. companies that are dedicated to consistently paying larger-than-average dividends. As of September 30, 2013, VYM comprised of some 390 large-cap value stocks, with net assets of the ten largest holdings comprising 33.8% of the fund’s total assets. In terms of sector concentrations, consumer goods stocks had a 15.3% weight in the index, followed by industrials, with a 14.4% weight, and financials, with a 12.6% weight. The ETF’s top holdings include Exxon Mobil (NYSE: XOM), Microsoft (Nasdaq: MSFT) and General Electric (NYSE: GE). Based on the Morningstar data, this ETF has a 12-month yield of 2.97% and a 30-day SEC yield of 3.19%. The fund has returned 18.05%, annualized, over the past three years, beating the S&P 500’s total return of 16.66%, annualized, over the same period. However, over a five-year investment horizon, the fund underperformed the S&P 500 index’s total return by 81 basis points.

On the other hand, the Vanguard Dividend Appreciation ETF is an investment vehicle for dividend-growth oriented investors pursuing a combination of growing dividend streams and expected strong total returns over longer periods of time. The fund tracks the price and yield performance of the NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index). The fund, based on the underlying index, comprises of companies with at least ten consecutive years of increasing annual regular dividend payments. This ETF invests in 146 mainly U.S.-based stocks, with the fund’s top ten holdings accounting for 36.6% of its overall assets. Its largest concentrations by sector are in consumer goods stocks (23.0% weight), industrials (22.0% weight), and consumer services stocks (16.5% weight). The ETF’s largest holdings include PepsiCo (NYSE: PEP), Procter & Gamble (NYSE: PG), and Wal-Mart Stores (NYSE: WMT). VIG has a 12-month yield of 2.14% and a 30-day SEC yield of 2.11%, which is generally consistent with the average dividend yield of the S&P 500 index. Aside from the slim yields, this ETF also barely outperformed the S&P 500 index over the past five years. Over that timeframe, VIG returned 10.27%, annualized, versus S&P 500’s 10.02%, annualized. On a three-year basis, the fund’s returns trailed the S&P 500 index total return by 1.11 percentage points.

Judging by the total returns from dividend-yield-focused and dividend-growth-based ETFs, in recent years, the evidence is mixed about which dividend-focused investment strategy wins. However, on a three-year basis, Vanguard’s high-yield ETF stands out as a clear winner, with its total returns exceeding the total returns of its dividend-appreciation-focused ETF counterpart by 2.2 percentage points. While the time horizon under consideration is relatively short, both ETFs present viable options for dividend-focused investors in the long-term dividend-centered investment contexts.

ETF name ISIN Price TER YTD Dividend Freq Ex Div Date Dividend Yield
Vanguard High Dividend Yield Indx ETF Dividend Vanguard High Dividend Yield Indx ETF on Bloomberg Vanguard High Dividend Yield Indx ETF VYM VYM Dividend Vanguard High Dividend Yield Indx ETF on Reuters Vanguard High Dividend Yield Indx ETF ETF on Yahoo! Finance US9219464065 84.76 USD 0.08 0.4606/22/20182.97
Vanguard Dividend Appreciation ETF Dividend Vanguard Dividend Appreciation ETF on Bloomberg Vanguard Dividend Appreciation ETF VIG VIG Dividend Vanguard Dividend Appreciation ETF on Reuters Vanguard Dividend Appreciation ETF ETF on Yahoo! Finance US9219088443 106.03 USD 0.08 4.91Quarterly06/28/20182.13