Investments

How Often Does VYM Pay Dividends

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

As the stock market has grown increasingly globalized, exchange-traded funds (ETFs) have risen to prominence since their creation in 1993. About half of all investment activity in the United States is now passive.

Vanguard is one of the most well-known fund families for good reason. Their funds have historically impressive returns, and they’re also known for having minimal fees relative to the competition.

However, the results of funds managed by the same person can vary widely. You’ve probably heard of the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (VYM) if you’re interested in investing for long-term growth and dividends (VYM). Which, perhaps, is the greatest of the bunch?

Key Characteristics

There are a few important characteristics to look for when comparing ETFs that claim to be the best for income investors. 

The most crucial point:

  • Mode of Investment. Since there are several approaches to dividend investing, Vanguard provides several choices for this type of investor. You should give some thought to the rationale behind the fund’s investing approach and whether or not it meshes with your own before committing.
  • Cost. There is always a price tag attached to an investment. The expense ratio of an ETF specifies these annual management fees as a percentage of the investment value. Expenditures eat away at your disposable income, therefore lowering them is preferable.
  • The best ever, by any measure Earnings, are critical to dividend investors, but capital growth is also crucial. What good is income if the value of your shares keeps going down, anyway? Therefore, before putting money into the fund, it’s necessary to evaluate how it has performed in the past.
  • Proceeds from Dividends. Naturally, the goal of every investor in a dividend-focused mutual fund is to receive dividend payments. Payments are a common goal for many funds, but the dividends investors get from these funds will vary widely. Look at the fund’s dividend track record and compare it to similar funds to be sure you’re getting the best bargain.
  • The Makeup of a Portfolio. In the end, a diversified portfolio of investments is constructed with the goal of protecting the principal while still allowing the fund to pursue its investment strategy. Before deciding to buy shares in the fund, it is prudent to learn what those assets are and how they will benefit your investment portfolio. With these considerations in mind, let’s look at how the VIG and VYM stack up against one another.

Style of Investing

These funds share a common goal—to generate substantial income without exposing investors to excessive risk—but they approach this goal in very different ways. Each fund’s investment strategy and its potential impact on your returns are outlined below.

VIG Investment Approach

Vanguard’s Dividend Appreciation ETF (VIG) is a dividend growth exchange-traded fund (ETF) aimed at providing investors with diversified exposure to U.S. firms with a history of raising dividends annually.

To qualify for purchase by the fund, shares must be included in the Nasdaq US Dividend Achievers Select Index (previously the Dividend Achievers Select Index). Included companies have a track record of annual dividend increases at least 10 years in a row.

The fundamental principle underpinning the fund is that dividends may only be increased annually by companies that are financially stable and increasing over the long term (10 years or more). 

By diversifying into these companies, your portfolio will be exposed to organizations with a demonstrated history of sustained growth and a commitment to returning a portion of that growth to shareholders.

Investing Style VYM

The Vanguard High Dividend Yield ETF isn’t looking for firms with a track record of dividend growth, but rather, companies with dividend yields that are above the averages for their respective industries.

The index that this fund follows is the FTSE High Dividend Yield Index, which measures the performance of companies with above-average dividend yields (excluding REITs) (REITs).

These stocks are selected for this fund in two important ways that differ from the VIG portfolio:

  • Interest in Dividends. The VYM fund invests in stocks with a focus on providing a greater dividend return than the market as a whole. Even while the VIG fund also buys dividend equities, its holdings are selected on the basis of their track record of dividend growth, regardless of whether the yields on those stocks are above or below average.
  • Increases in Dividends Paid. The VYM portfolio does not prioritize dividend growth. Despite the fact that stocks in the fund may occasionally lower dividends, they will continue to be selected as long as they produce yields that are above average. The VIG fund, on the other hand, seeks out stocks that have a history of increasing dividends, independent of current yield.

Cost

Whether you’re investing in stocks, ETFs, mutual funds, or some other asset, it’s important to keep costs in mind. Both of these funds share the same low expense ratio that is standard for exchange-traded funds (ETFs).

The expenditure ratios for both of these options are among the lowest in the market, coming in at just 0.06%. When compared to the average expense ratio of an exchange-traded fund, which is roughly 0.44%, the fees charged by both of these funds are noticeably lower.

Consider a $1,000 investment to get a sense of how affordable these funds can be. With a yearly expense ratio of 0.06%, holding either of these funds will cost you less than a pack of bubble gum.

Current Performance

When picking an ETF, one of the most crucial variables to look at is how well it has performed in the past in terms of price growth.

Certainly, the goal of any investor considering either of these funds is income generation. There’s certainly nothing wrong with hoping for some capital appreciation in addition to your salary.

Even while dividend funds won’t outperform growth or value funds, it’s still wise to factor in price appreciation over the long term before making a commitment. Here’s how the two investment vehicles compare:

Historic Performance by VIG

This fund’s exceptional performance since inception has earned it a three-star rating from Morningstar, the highest possible rating for a mutual fund.

The fund has returned over 34% annually for its investors. Annualized returns during the past three, five, and ten years have averaged 17.21%, 15.42%, and 13.01%, respectively.

That’s a phenomenal return, especially when compared to the average returns of dividend-focused ETFs during the past year (13.45%), three years (10.46%), five years (15.76%), and ten years (7.33%).

Historic Performance of VYM

Even though this fund has a higher Morningstar rating than VIG (four stars vs. five), its long-term performance has lagged behind VIG.

A year ago, VYM shareholders earned 37.24 percent, well exceeding the return on investment offered by its rival. Its returns were lower than the VIG fund over the past three, five, and ten years, coming in at 11.66%, 11.43, and 12.28%, respectively.

Dividend Payments

It goes without saying that dividends are the primary attraction for any investor considering these funds. To what extent do their respective incomes compare, then?

VIG Dividend Payments

There are two main things to keep in mind regarding dividends:

  • Interest in Dividends. The dividend yield on the fund has been between 1.49 and 2.39 percent during the previous five years, which is slightly less than half of the yield offered by VYM.
  • Increases in dividends paid. Consideration should also be given to dividend growth. After all, a firm with a high dividend yield today but a bad payout history may see its yield drop dramatically in the future. VIG has been a top performer, and it’s no surprise why the fund was created to follow firms that are known to increase their dividends on a regular basis, so it stands to reason that their yearly payouts will rise as well.

Dividend payments for VYM

The following are some key indicators of this fund’s dividend performance:

  • Interest in Dividends. The VYM fund’s dividend yield has been much higher than its competitor’s during the previous five years, varying between 2.64% and 4.50%.
  • Increases in Dividends Paid. Even if dividend growth isn’t the fund’s primary objective, it has also been extremely successful in recent years, with payments to investors rising at a relatively steady clip.

Portfolio Organization

The asset allocation of each fund is shown in the table below:

SectorVIGVYM
Basic Materials3.40%3.30%
Consumer Goods11.50%15.00%
Consumer Services20.00%9.10%
Financials10.80%15.80%
Industrials25.00%8.40%
Oil & Gas0%5.50%
Technology10%11.20%
Telecommunications0%5.50%
Utilities6.60%10.00%

The VIG Top Holdings

Microsoft (MSFT), JPMorgan Chase (JPM), Johnson & Johnson (JNJ), Walmart (WMT), and UnitedHealth Group (UNH) are the top five stocks in this portfolio (UNH).

Top Holdings VYM

Bank of America (BAC), The Home Depot (HD), Procter & Gamble (PG), and JPMorgan Chase (JPM) are the top five holdings in this portfolio (BAC).

Should You Select the VIG or the VYM?

Neither of them will be the best choice for all investors, as is always the case in the world of finance. After all, each investor has unique needs, resources, preferences, and time horizons when it comes to investing.

There is no one-size-fits-all solution, but here are some things to keep in mind as you compare these two high-quality dividend funds.

Investing in the VIG Fund Is a Good Idea If…

If you meet these criteria, the VIG fund may be for you:

  • You Care About Both Income and Appreciation of Value. The VIG fund generates a decent return, but it pales in comparison to that generated by VYM. The difference is recovered through higher returns in the long run. While both funds have seen a price rise, the VIG fund has outperformed the VYM fund in the long run.
  • That’s Great Because you Seem to be Looking Into Growth Investing. Growth investing is common because it seeks to increase the value of an investment over time, and there are benefits to combining growth with income. The bulk of the stocks held by the fund is well-known for growth in dividends as well as other measures like sales and earnings, as the fund primarily invests in firms with a track record of continuous dividend growth.
  • There Should Be Less Danger of a Drawdown, You Say. In spite of the fact that both funds have delivered comparable returns over time, comparing their respective charts reveals that the VIG fund is the more reliable choice when market downturns occur. It’s the best option if you’re looking for a fund with less drawdown risk.

You Must Invest in the VYM Fund If…

If any of these apply to you, the VYM fund is the way to go:

  • You Should Be Mainly Concerned With Earning Money. There is no denying that the VYM fund produces more money than the other option. The fund’s dividend yields over the previous five years have been nearly twice what would be predicted for a stock like VIG.
  • You are Comfortable with a Higher Potential for a Drawdown. During market declines and bad markets, the VYM fund has historically suffered greater drawdowns than the VIG fund. Short-term traders who don’t have the luxury of time to wait out market downturns may be discouraged by this.

Both Are Excellent If…

For most investors, a combination of the two is the optimal strategy. If you fit one of the following categories, these funds are for you:

  • You Need a Wide Range of Options to Choose From. One of the best methods to safeguard your portfolio against devastating losses is to invest in a wide variety of stocks, industries, and market capitalization. If the value of a single stock or industry plunges, the steadiness of your other investments can help cushion the blow.
  • You Seek Exposure to Growth and Intriguing Income. The VYM fund is the best option for income investors, while the VIG fund is the best option for growth investors. Combining the two is a fantastic option, though, if you want exposure to both.

Bottom Line

You can expect high-quality alternatives from a reputable fund management business like Vanguard, and you won’t be disappointed by either the Vanguard Dividend Appreciation ETF or the Vanguard High Dividend Yield ETF. 

They both have cheap costs in comparison to the industry average, in addition to providing income and impressive past success. Although some investors will lean one way or the other, the safest bet is to pick both. This way, you can boost your portfolio’s diversification while still taking advantage of the growth and high dividends.

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