Fidelity vs. Vanguard: Which Brand Wins for Dividend Investors?

Vanguard and Fidelity are two of the biggest names in the investment world. Together, they manage trillions of dollars in assets and are top investing destinations for almost any financial goal.

For those seeking income generation, both issuers offer quality exchange-traded funds (ETFs), although somewhat limited dividend ETFs. In terms of dividend income strategies, both Vanguard and Fidelity offer several relatively standard options, but surprisingly little that would be considered a robust or unique approach.

Before diving deeper into which of the two is the better dividend ETF issuer, let's do a quick rundown of the lineup that each offers.

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The Vanguard dividend ETFs

The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) has a straightforward strategy. It targets companies with a streak of consecutive annual dividend growth covering at least 10 years, while eliminating the top 25% of yields from consideration.

The Vanguard International Dividend Appreciation ETF (NASDAQ: VIGI) is the international version of the fund above. The only major difference is that this index requires only a seven-year track record of annual dividend growth.

The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) is a pretty generic high-yield portfolio. It starts with a large universe of U.S. dividend-paying stocks, calculates the indicated yield for each, and simply grabs the top half of all yields.

The Vanguard International High Dividend Yield ETF (NASDAQ: VYMI) is the international version of the above ETF.

The Vanguard Wellington Dividend Growth Active ETF (NYSEMKT: VDIG) is at least unique in that it's actively managed and targets high-quality companies that have shown an ability and a willingness to grow their dividends over time.

The Fidelity dividend ETFs

The Fidelity High Dividend ETF (NYSEMKT: FDVV) is the best-known of Fidelity's dividend funds. Its strategy is heavily tilted toward yield, but it also considers the dividend growth rate and payout ratio. This gives it a bit of a multi-factor twist.

The Fidelity International High Dividend ETF (NYSEMKT: FIDI) does the same thing but for non-U.S. stocks.

The Fidelity Dividend ETF for Rising Rates (NYSEMKT: FDRR) is perhaps the most different of the bunch. It gives consideration to the same three factors that the high-yield ETFs do, but also looks at the stock's correlation to 10-year Treasury yields. Those with a higher correlation get preference.

Vanguard dividend ETF assessment

I have consistently said that I'm not a fan of the strategies used by the two Vanguard high-yield ETFs, although I still acknowledge that they're very popular with income investors. Their strategy of simply including every above-average yield is made worse by the fact that the portfolios ultimately are weighted by market cap. Any consideration of the company's dividend profile is ignored in favor of the company's size.

Neither of the strategies used by the Vanguard and Fidelity high-yield ETFs is particularly good, but I think Fidelity's approach is modestly better.

The strategies for Vanguard's dividend-growth ETF are fairly vanilla. I like the elimination of the highest yields, but they are also cap-weighted and give too much weight to big tech names.

The Vanguard Wellington Dividend Growth Active ETF is at least a little more differentiated, but it also seems to struggle in execution. It only yields about 1% and has nearly 30% of its portfolio in tech stocks, most of which offer little yield.

Fidelity dividend ETF assessment

For me, the choice between the high-yield ETFs is easy. I clearly prefer Fidelity's.

The consideration of dividend growth rate and payout ratio is minor in the Fidelity high-yield ETFs, but at least it's there to provide a bit of a quality check. Unfortunately, the weighting strategy puts the megacap tech names at the top of the portfolio, which is against what a true high-yield strategy should produce.

Fidelity's Rising Rates ETF has the right idea, but only 10% of its scoring formula is based on the correlation to yields. And its top five holdings are all megacap tech stocks. I don't think it's as much of a rising-rate hedge as is advertised.

Fidelity vs. Vanguard: Which one comes out ahead?

There's a lot of improvement that could be made on both sides, but there's enough here for dividend investors to find something that suits their needs.

Vanguard obviously wins on the dividend-growth side simply because Fidelity doesn't offer that right now. Vanguard's products use a relatively balanced approach that allows for the inclusion of both long-term and "emerging" dividend growth stocks. That makes these ETFs good choices overall.

I mentioned before that I clearly like Fidelity in the high-yield category, although everything on both sides seems structured to overweight megacap tech. Truer high-yield strategies would likely emphasize financials and energy a little, and I would prefer to see some of that here.

As far as breadth of offerings, Vanguard wins. Specifically, in the high-yield category, I think Fidelity wins. All of them, however, have their flaws.

David Dierking has positions in Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.