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When choosing a dividend ETF, investors often need to lean in one of two directions with their strategy. They can target dividend growth stocks where the yields are usually lower but they see steadily increasing dividend payments over time. Or they can choose to invest in high-yield stocks where they earn more income now but may be vulnerable to more variability.
That’s the dilemma when choosing between the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) and the iShares Core High Dividend ETF (NYSEMKT: HDV). The dividend growth vs. high yield debate ultimately comes down to which path you prefer or need. But the stock selection methodology could tilt the decision one way or the other.
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There are a number of factors to consider when weighing these two, so let’s break it all done for these two highly rated dividend ETFs.
Key takeaways
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VIG yields 1.7% and requires companies to have 10 consecutive years of dividend growth. HDV yields 3% but focuses on higher yield and quality.
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HDV holds 75 stocks versus VIG’s 334. This makes HDV a more concentrated portfolio.
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VIG has outperformed HDV on a 10-year annualized basis, 12.9% versus 9.4%, which is reflective of the Vanguard ETF’s higher allocation to tech stocks.
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The two funds have only a 21% overlap of holdings, making them complementary instead of redundant in a portfolio.
VIG vs. HDV: How the portfolios are constructed
The Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index, which screens for companies with 10+ straight years of annual dividend growth. Qualifying components are then weighted by market capitalization.
While the fund’s strategy delivers on its dividend growth promise (the fund has increased its annual dividend in each of the past 12 years), the weighting method gives it a different feel from other dividend growth ETFs. By weighting according to company size and not any particular dividend-related factor, you get several low-yielding mega-cap tech stocks at the top of the portfolio. The top three holdings are Broadcom, Apple, and Microsoft. Each has a yield of less than 1%.
The iShares Core High Dividend ETF is linked to the Morningstar Dividend Yield Focus Index. Eligible securities must score well on two proprietary Morningstar screens, each designed to ensure financial health. Stocks are weighted by the total dollar amount of dividends paid rather than yield.
The use of Morningstar financial health screens gives this fund an explicit quality component that’s usually beneficial when paired with a high yield strategy. Focusing on yield alone can result in the inclusion of stocks whose yields are artificially high due to a falling share price or those that are vulnerable to a dividend cut. Adding the quality screen as a cross-check helps filter some of that risk out. Investors end up receiving a more sustainable high yield.
VIG vs. HDV: Performance and key metrics
|
Metric |
VIG |
HDV |
|---|---|---|
|
Expense ratio |
0.04% |
0.08% |
|
AUM |
$99 billion |
$13 billion |
|
Dividend yield |
1.7% |
3% |
|
1-year return |
24.6% |
22.8% |
|
10-year average annual return |
12.9% |
9.4% |
|
Number of holdings |
334 |
75 |
|
Top sectors |
Technology (23%), financial (21%), healthcare (18%) |
Consumer staples (24%), energy (22%), healthcare (17%) |
Data sources: Vanguard, BlackRock.
The Vanguard Dividend Appreciation ETF has outperformed the iShares Core High Dividend ETF over the past 10 years in large part due to that 23% allocation to tech. That’s something you don’t usually find in dividend ETFs.
Overall, I view the Vanguard ETF as a traditional dividend growth strategy with a growth tilt. That combination of income plus growth upside might be appealing to those looking for that balance. It might be less suitable for those seeking a more defensive stock selection process.
I like that the iShares ETF combines yield and quality considerations. I’d be nervous about any dividend ETF that selects based on yield alone. The inclusion of quality criteria makes this, in my opinion, one of the better high-yield options available.
If faced with a choice between these two ETFs, I prefer the iShares Core High Dividend ETF. The 3% yield provides meaningful income and is backed by a quality safety net. The Vanguard Dividend Appreciation ETF delivers on dividend growth, but the low yield and heavier focus on tech gives investors a risk profile they may not necessarily want.
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David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Broadcom, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
VIG vs HDV: Growing Your Income vs. Maximizing It Now was originally published by The Motley Fool
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