Which Vanguard Dividend ETF Is the Better Buy: VIG or VYM?

Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) focuses on companies with a history of increasing their payouts, while Vanguard High Dividend Yield ETF (NYSEMKT:VYM) targets a broader group of stocks that offer a higher current yield.

Vanguard offers two primary options for equity income investors, but their underlying philosophies differ significantly. This comparison examines whether VIG’s focus on dividend consistency provides a better balance of growth and stability than VYM’s high-yield screening in the current market environment.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Cost is a non-issue in this matchup, as both funds feature identical 0.04% expense ratios, placing them among the most affordable options in the category. The primary differentiator is the income profile; VYM offers a higher current payout than VIG.

Performance & risk comparison

What's inside

Vanguard Dividend Appreciation ETF (VIG) focuses on quality by requiring its holdings to have a history of increasing dividends for at least 10 consecutive years. Its portfolio of 338 stocks is heavily weighted toward technology (26%), financial services (21%), and healthcare (16%). Its largest positions include Broadcom at 5.42%, Apple at 4.58%, and Microsoft at 4.28%. This fund was launched in 2006 and paid $3.45 per share over the trailing 12 months.

Vanguard High Dividend Yield ETF (VYM) casts a wider net with 589 holdings and a different sector mix led by financial services (20%), technology (18%), and healthcare (12%). Its top holdings include Broadcom at 8.52%, JPMorgan Chase & Co. at 3.15%, and Exxon Mobil at 2.53%. Also launched in 2006, it has a trailing-12-month dividend of $3.51 per share, reflecting its objective of capturing higher-than-average current yields through a diversified equity strategy.

For more guidance on ETF investing, check out the full guide at this link.

Which dividend ETF is the better buy?

VIG and VYM have delivered annualized total returns of 10.1% and 9.3%, respectively, over their roughly 20-year history. VIG’s slight outperformance makes perfect sense as it typically seeks slightly higher-growth stocks, as opposed to the steady-Eddie businesses that are tailor-made for VYM.

However, this little bit of outperformance comes with slightly more volatility, a larger five-year drawdown, and a smaller dividend yield. Said another way, both ETFs are excellent options for dividend investors, but which one you choose likely depends on your investing strategy, risk tolerance, or perhaps even age.

If you’ve got decades before retirement, VIG’s 7% annualized dividend growth rate over the last decade probably makes more sense compared to VYM’s 5% mark. However, if you’re closer to retirement, VYM’s higher 2.2% dividend yield and stability may hold more sway for you. That said, investors need to beware VYM’s hefty 8.5% portfolio allocation to Broadcom, which has recently ballooned thanks to the stock’s soaring share price.

Ultimately, I could only look to buy VIG because I am a dividend growth stock fan by nature and likely have decades to go before retirement, so I’d rather see my dividend payments compound over time rather than receive a higher yield today.

JPMorgan Chase is an advertising partner of Motley Fool Money. Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Broadcom, JPMorgan Chase, Microsoft, Vanguard Dividend Appreciation ETF, and Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.