These two funds are an income investor’s best friend.
Dividend stocks have proven to be enduring powerhouses of wealth creation. Since 1960, an astounding 85% of the S&P 500‘s total returns can be attributed to reinvested dividend payments and the magic of compounding.
While growth stocks have hogged the spotlight since 1995, savvy investors know that sprinkling in top-tier dividend stocks — or better yet, dividend-focused exchange-traded funds (ETFs) — can provide a robust foundation for long-term performance.
Which dividend equities stand out as top buys right now? Vanguard, a top-tier fund family, sports several dividend-centric ETFs.
Two of the best performers on multiple metrics are the Vanguard High Dividend Yield Index Fund ETF Shares (VYM 0.93%) and the Vanguard Dividend Appreciation Index Fund ETF Shares (VIG 0.90%). Read on to find out more about these two standout performers in the dividend category.
Vanguard High Dividend Yield Index Fund ETF Shares
For investors seeking steady income, the Vanguard High Dividend Yield Index Fund ETF Shares offers an attractive proposition. This ETF tracks the FTSE High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
Key traits:
- A superb yield: This Vanguard ETF sports a healthy 30-day SEC yield of 2.85%, which significantly outshines the S&P 500’s average yield of around 1.32%.
- High diversification factor: The fund holds 556 stocks, providing broad exposure to dividend-paying companies across various sectors.
- Low costs: With an expense ratio of just 0.06%, this Vanguard ETF is one of the most cost-effective ways to access a diversified basket of high-yield stocks.
- Sector allocation: This dividend-heavy fund has significant exposure to financials, healthcare, and consumer staples — sectors known for their stable cash flow and top-tier dividend programs.
- Performance: While past performance doesn’t guarantee future results, the Vanguard High Dividend Yield Index Fund ETF has delivered exceptional returns for an income-focused fund, with a 10-year average annual return of 9.4% as of mid-2024.
Vanguard Dividend Appreciation Index Fund ETF Shares
For those with a longer-term perspective, the Vanguard Dividend Appreciation Index Fund ETF Shares offers a compelling alternative. This ETF tracks the S&P U.S. Dividend Growers Index, which focuses on companies with a record of growing their dividends year over year.
Key traits:
- Dividend growth: This Vanguard dividend-growers fund focuses on companies with track records of boosting the size of their dividend checks year over year, a sign of financial health and shareholder-friendly management.
- Dividend yield: While the fund’s 30-day SEC yield of 1.75% is lower than the Vanguard High Dividend Yield Index Fund ETF Shares, its focus on dividend growth can lead to higher total returns over time through the power of compounding returns.
- A focus on quality: The dividend-growth requirement tends to filter out financially weaker companies, resulting in a portfolio of high-quality stocks. This is a key reason income investors often favor lower-yield, dividend growers over high-yield or ultra-high-yield stocks.
- Diversification: The Vanguard Dividend Appreciation Index ETF holds 339 stocks, providing broad exposure to dividend growers across a range of sectors.
- Low costs: With an expense ratio of 0.06%, this dividend-growers fund is one of the most cost-effective in the category.
- Sector allocation: The Vanguard Dividend Appreciation Index Fund ETF has a heavy tilt toward information technology, a sector known for its above-market growth.
- Performance: This Vanguard dividend-growth fund has delivered an outstanding 11% average annual return over the prior 10 years.
The fund’s core focus on dividend growth makes it an excellent choice for investors seeking a balance of current income, long-term capital appreciation, and perhaps most importantly, quality.
George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.