Vanguard needs no introduction. We are talking about one of the largest investment companies in the world, catering to over 30 million investors. If you are a Vanguard fan and a lover of dividend funds, then you are at the right place.
This article will discuss the four best Vanguard dividend funds you should consider from your favorite fund manager. The talking points for these ETFs include their indices, investment strategies, exposure, size, and pros and cons. In addition, we will touch on how dividend ETFs work and why they may be suitable for your investment goals.
Before we get to the main talking points, here are the key takeaways from this article;
- The top four Vanguard Dividend ETFs include VIG, VIGI, VYM, and VYMI.
- Dividend investors will find Dividend ETFs efficient vehicle investments to expose their portfolios to companies that pay dividends.
- Dividend investment is best suited for retired investors looking to get income or long-term investors looking to put money in quality stocks.
- Dividend stocks are known for their low costs and relatively better yields and performance than other stock types.
- Vanguard is a top mutual fund company offering investors several low-cost, no-load ETFs.
- Consider the fees, yield, liquidity, and portfolio composition when choosing the right Vanguard Dividend ETF for your portfolio.
What Are Dividend Stocks?
The best way to understand Dividend ETFs is to become familiar with dividend stocks. A dividend is a regular distribution of part of a company’s earnings to shareholders, either as cash or additional stock. Other types of dividends include Dividend Reinvestment Programs (DRIPs), Special Dividends, and Preferred Dividends.
Not all stocks or companies pay dividends – only dividend stocks do. Only well-established companies that can thrive without reinvesting as much money into their business pay dividends. That is why tech, biotech, and other high-growth companies do not pay dividends – they need to expand growth by reinvesting their profits.
Investors in dividend stocks get paid per share of stock. For example, if you own 50 shares in a company that pays $3 in annual cash dividends, your dividend for that year will be $150. You can either claim this in cash or re-invest it in your portfolio to increase your stock allocation. Investing in dividend-paying stocks offers a stable means of growing income.
Investors also choose dividend mutual funds because it helps outpace inflation. The stock market is prone to market shifts caused by several market forces without connection to the underlying business. Dividend stocks may experience significant volatility over short periods and are therefore best suited for long-term investment plans.
Now that we know what dividend stocks are all about let’s look at Dividend Exchange Traded Funds (ETFs).
How Do Dividend ETFs Work?
One way to earn dividends is to buy stock in a company that pays dividends. You look for dividend-paying companies and buy their stocks individually. A dividend equity ETF is designed to work similarly but using a more diversified approach. ETFs with high dividend yields are called Dividend ETFs, and they tend to hold multiple companies with high dividend yields than average.
The primary goal of these ETFs is to expose investors to excellent gains through high yields. Therefore, their portfolios may contain only U.S. domestic stocks and/or global dividend ETFs. Vanguard Dividend ETFs, like most dividend ETFs out there, are passively managed. They all track a specific index to cover firms that regularly provide dividends.
Dividend ETFs have set dates for dividend payments. They do not work with the schedule of the dividend stock. Unlike fixed-income ETFs, a dividend ETF pays varied dividends, usually determined by the performance of the dividend stocks in its portfolio.
Are Dividend ETFs Right for You?
No investment vehicle is perfect for every investor, and dividend ETFs are no exception. You should only opt for dividend ETFs if you seek a regular income coupled with potential long-term growth. Some dividend ETFs, especially those on my list, are known to be less risky because they have broad market exposure and diversification. The expense ratios are also lower compared to actively managed funds.
Statistics have shown that dividend ETFs have become more popular over the years. In 2020, there was a record $504 billion dividend ETF flow. The number rose to over $800 in 2021, according to CFRA Research Reporting. The future looks even more promising, with David Botset, the Head of Strategy at Charles Schwab, tipping the dividend ETF flows for 2022 to exceed $1 trillion.
It is essential to state that dividend payments are not guaranteed and may not increase consistently over time. Dividend ETFs are also known for their relatively slow growth compared to other ETFs. Investors are expected to pay tax on dividends in the year they are distributed. Taxes are payable on all types of dividends, whether you are getting it in cash, as dividends, or reinvestments.
4 Dividend ETFs from Vanguard
Finding the best dividend ETFs is a research-intensive process. That is why I have put together a well-researched list of the four dividend ETFs from the stables of Vanguard for you.
1. Vanguard Dividend Appreciation ETF (VIG)
The first Vanguard Dividend ETF on my list is the Vanguard Dividend Appreciation ETF (VIG). This ETF is designed to track the performance of the NASDAQ US Dividend Achievers Select Index. Regarding investment strategy, VIG is a large-cap equity fund, particularly about dividend growth stocks as indicated in the types of companies in its portfolio. It exposes your portfolio to companies with a track record of consistently increasing dividend payments annually in the last ten years.
Since its inception in 2006, VIG has amassed over $76 billion in assets under its management. Within the same period, it recorded 298.64% in total returns. It has also recorded 31.52% and 69.95% in total returns over the last three and five years, respectively. The fund’s dividend yield is 1.7%, and it pays dividends quarterly, usually around $0.50 to $0.60 per share in the past year.
In terms of composition, there are 289 stocks in VIG’s portfolio, all of which are U.S. and foreign large- and mid-capitalization value stocks. The major sectors covered by VIG’s portfolio include Information Technology (26%), Healthcare (15.80%), Financials (15.00%), Consumer Staples (13.00%), and Industrials (12.90%). The expense ratio of this ETF is 0.06%.
VIG can be summarized as follows;
- Expense ratio: 0.06%
- Dividend Yield: 1.77%
- Total Net Assets: $76.1 billion
- Major Holdings: Johnson & Johnson, Microsoft Corp, United Health Group Inc, JPMorgan Chase & Co, and Procter & Gamble Co.
2. Vanguard International Dividend Appreciation ETF (VIGI)
The Vanguard International Dividend Appreciation ETF (VIGI) is another high-quality dividend ETF from Vanguard. It was created in February 2016 as an international/global stock ETF under the foreign large blend category. VIGI seeks to track a market-cap weighted index of developed and emerging market firms, excluding the United States, which is the S&P Global Ex-U.S. Dividend Growers Index.
Both VIG and VIGI use the same methodology to amass cap-weighted stocks of international firms with a history of steadily increasing dividends. But while VIGI requires seven years of dividend growth, VIG requires ten. VIGI is also bigger than VIG, with 317 total stocks in its portfolio, 99.4% of which are foreign holdings spread across Canada (17.60%), Switzerland (16.70%), Japan (14.80%), the United Kingdom (7,60%), and India (6.60%).
The total net asset of VIGI is smaller – $4.2 billion compared to VIGI’s $76.1 billion. VIGI has also recorded 5.13% and 3.99% as total returns in the last five and three years, respectively. Like other ETFs on the list, VIGI is passively managed with low expenses. The expense ratio is 0.15%.
VIGI can be summarized as follows;
- Expense ratio: 0.15%
- Dividend Yield: 1.17%
- Total Net Assets: $4.2 billion
- Major Holdings: Novartis AG, Novo Nordisk A/S, Nestle SA, Tencent Holdings Ltd, and Toronto-Dominion Bank.
3. Vanguard High Dividend Yield ETF (VYM)
The Vanguard High Dividend Yield ETF (VYM) is one of Vanguard’s best dividend ETFs and one of the most popular among dividend investors. VYM is designed to track the FTSE high dividend yield index, which comprises mainly the U.S.-based stocks known for their higher-than-average dividend yields.
According to Vanguard, VYM is suitable for investors looking to track the performance of stocks with above-average dividend yields. There are over 400 individual large-value stock holdings in VYM’s portfolio, with 10 top holdings accounting for about 25% of the total fund. Therefore, the fund is well-diversified.
In terms of dividends, the average dividend yield of VYM has increased over the years and currently stands at around 3%. The dividend growth is somewhere between 6 and 8% each year, depending on economic conditions. Regarding total return, VYM has returned about 9% since its launch in 2006.
The top five sectors covered in VYM’s portfolio include Financial Services (20.3%), Healthcare (15.47%), Consumer Defensive (13.47%), Energy (10.08%), and Industrials (9.93%). The fund’s total net assets currently stand at $58.9 billion.
VYM’s expense ratio is 0.06%.
VYM can be summarized as follows;
- Expense ratio: 0.06%
- Dividend Yield: 2.72%
- Total Net Assets: $58.9 billion
- Major Holdings: Johnson&Johnson, Exon Mobil Corp., JPMorgan Chase & Co, Procter & Gamble Co., and Chevron Corp.
4. Vanguard International High Dividend Yield ETF (VYMI)
The fourth and the last entry on my list of Vanguard dividend ETFs is the Vanguard International High Dividend Yield ETF (VYMI). It tracks the FTSE All-World ex-US High Dividend Yield Index, comprising stocks with higher-than-average dividend yields. With VYMI, investors can expose their portfolios to high international dividend yields through companies in developing and emerging markets outside the United States.
According to Vanguard, the stocks in VYMI’s portfolios were chosen by combining characteristics like industry weightings, market capitalization, and financial measures like price/earnings ratio and, of course, dividend yield. As a large international value fund, this ETF consists of over 1000 international stocks – 99.2% of which are foreign holdings in Europe (42.70%), Pacific (25.70%), Emerging Markets (22.20%), and North America (8.90%).
With over 1000 stocks, VYMI is the most diversified fund on this list. The equity sector diversification is equally impressive; the top five sectors include Financial Services (34.17%), Energy (10.87%), Basic Materials (10.06%), Industrials (9.02%), and Consumer Cyclical (7.57%). VYMI also has the highest dividend yield – around 3-5% since its inception in 2016. Over the same period, it has recorded an annual average total return of around 10% and amassed $4.6 billion in total net assets.
The expense ratio is 0.22%.
VYMI can be summarized as follows;
- Expense ratio: 0.22%
- Dividend Yield: 3.48%
- Total Net Assets: $4.6 billion
- Major Holdings: Roche Holding AG, Shell PLC, Toyota Motor Corp, Novartis AG, and BHP Group Ltd.
Investors’ decisions to invest in dividend ETFs are often informed by two main points – to earn regular income from the stock market in the form of dividends and take advantage of possible long-term growth. However, the current economic climate has made these ETFs more appealing to investors. For example, interest rates are pretty low. This low-interest-rate environment makes it difficult for individuals who need income to find it. Fortunately, dividend investing offers a more favorable and effective way to earn a consistent income, especially with dividend ETFs.
Which is the best Vanguard dividend ETF?
The dividend exchange-traded funds (ETFs) from Vanguard discussed in this article offer an investor access to low-interest rates, diversification, and potential steady payout. That said, it is impractical to have all four in your portfolio. This leads us to the question of which is the best Vanguard dividend ETF?
There is no definite answer to this question. The dividend ETFs you end up choosing will depend on your personal decision. However, to help you make a sound decision, we recommend you assess each option based on dividend payouts frequency, yields, future growth opportunity, level of risk, and tax rate. You should also outline your investment objectives, risk tolerance, and asset mix to determine which dividend ETF best fits into your portfolio.
With that, we round up this review of the best four best Vanguard dividend funds ETFs in the current market. If you enjoy this, you can check out more educative asset reviews.
NB: None of the information in this article may be considered or taken as investment advice.