Dividend investing is becoming increasingly popular. More investors are looking into stocks offering dividends to ensure they get regular income periodically. Dividend exchange-traded funds (ETFs) are one of the ways to access dividend investing and are even more popular because of their easy accessibility and low costs.
This article will discuss two high dividend ETFs from reputable issuers in the current market – the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) and Vanguard High Dividend Yield ETF (VYM). As always, the goal is to help investors know more about these mutual funds, the underlying index or investing strategies, and most importantly, see which is a better fit for their portfolios.
So, if you are ready, let’s start with the key takeaways.
Key Takeaways
Not chanced to follow the article to the end? Read the important takeaways below:
- Unlike other dividend-yielding investment vehicles, dividend ETFs ensure healthy diversification by allowing access to groups of dividend stocks instead of individuals.
- Both SPHD and VYM are two high-yielding dividend ETFs that offer value (dividends) to investors through different investment strategies.
- VYM is bigger than SPHD in terms of number of holdings and total assets under management.
- SPHD is cheaper than VYM, with an expense ratio of 0.30%, 50% less than VYM’s 0.06%.
- Both ETFs have performed pretty well, but VYM has been the better performer in the last five years.
- SPHD offers more in terms of monthly dividends–it is more suitable for investors who prefer higher returns.
- VYM offers smaller dividends but makes up for this by offering improved safety and capital preservation.
SPHD vs. VYM: At a Glance
Here is a brief overview of VYM and SPHD.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Invesco is one of the market’s most prominent fund issuers and managers, and SPHD is one of its top products. SPHD is a high-divided low volatility ETF designed to track the S&P 500 Low Volatility High Dividend Index (more on this later). There are 50 stocks in SPHD’s portfolio, all of which have recorded high dividend yields with low volatility. Although it may seem like a broader market large-cap ETF, SPHD tends to favor traditionally defensive industries slightly more. SPHD was launched in October 2012, and its expense ratio is 0.30%.
Vanguard High Dividend Yield ETF (VYM)
VYM is from the stables of Vanguard. The ETF provides investors diversified and conservative exposure to high-dividend yield stocks at a low cost. It tracks the FTSE High Dividend Yield Index (more on this later). The stocks in VYM’s basket include high-dividend paying stocks of US companies without REITs. Vanguard employs the market cap in weighing these stocks instead of dividends. This ETF is suitable for investors looking for more broadness and diversification. VYM was launched in November 2006, and its expense ratio is 0.60%.
SPHD vs. VYM: Investment Strategies
As mentioned earlier, SPHD and VYM employ different investment methodologies to provide their investors with dividends.
Underlying Index
SPHD is based on the S&P 500 Low Volatility High Dividend Index and invests not less than 90% of its total assets into this index. The index comprises 50 securities, all of which are traded on the S&P 500 index and have shown a history of returning high dividend yields at low volatility. So, instead of delivering the entire US equity market, SPHD picks only 50 of the least volatile names from the highest dividend-yielding stocks on the S%P 500. The selected stocks are weighted according to dividend yields of the last 12 months, capping the sector weights at 25%. Invesco rebalances and reconstitutes both the fund and the index every six months.
VYM is designed to track the performance of the FTSE High Dividend Yield Index–an index measuring the investment return of common stocks of US companies characterized by high dividends, excluding REITs–using the indexing investment approach. These stocks are ranked by their forecasted dividend yield over the next 12 months, and only the top half is chosen after being weighed by the market cap instead of dividends. The conservative investment approach VYM adopts makes it a good choice for investors that want to focus on broad dividend diversification.
Portfolio Composition and Exposure
SPHD has 50 securities in its portfolio, including 44.63% large-cap value stocks, 29.41% mid-cap value stocks, 17.96% mid-cap blend stocks, 5.21% large-cap blend stocks, and 2.79% small-cap value stocks. The biggest sectors in its portfolio include:
- Utilities – 21.63%
- Consumer Staples – 19.91%
- Health Care – 2.32%
- Real Estate – 10.87%
- Energy – 9.13%
- Materials – 7.52%
Regarding top holdings, the popular names include Altria Group, Kinder Morgan, Vornado Realty Trust, AT&T, and Iron Mountain, among others. The top 10 weighting of SPHD’s portfolio is 26.00%.
VYM comprises 443 large value high dividend paying stocks spread across the market’s various sectors. The most significant sectors in VYM’s portfolio include:
- Financials – 19.40%
- Health Care – 15.50%
- Consumer Staples – 13.40%
- Industrials – 9.90%
- Energy – 9.20%
- Utilities – 8.40
The top 10 holdings in VYM’s portfolio include Johnson & Johnson, Exxon Mobil Corp, Procter & Gamble Co., JPMorgan Chase & Co, and Pfizer Inc. The total top 10 weighting of the portfolio is 23.5%.
SPHD vs. VYM: Performance and Dividend Yield
This is perhaps the most important part of this comparison. Let’s see how both mutual funds have fared regarding dividend yield, average annual returns, and capital growth in the past.
Dividend Yield
As indicated earlier, the better fund in terms of dividend yield is SPHD. The higher dividend yield of 4% SPHD offers is one of its major strengths and advantages over VYM. On the other hand, VYM is not far behind, with a dividend yield of 3.11%.
Portfolio Growth
If you invested $10,000 into both SPHD and VYM in October 2012, here is what you would have now:
- $25,664 in your SPHD portfolio, translating to 156.64% portfolio growth.
- $27,915 in your VYM portfolio, translating to 179.15%.
The above shows VYM to be the better performer, with over 20% more increase than SPHD.
Annual Average Returns
SPHD has returned 10.03% since its inception, about 2% higher than VYM’s. While there is no sufficient data to compare their performance in the last ten years (SPHD was launched in late 2012), SPHD has returned 6.20% and 6.09% in the previous five and three years, respectively. The numbers are higher for VYM, turning in 9.43% and 10.00% in the last five and three years, respectively.
SPHD vs. VYM: Tax and Expenses
Expense Ratio
SPHD will be your pick if you want to minimize costs as much as possible. It has an expense ratio of 0.03%, unlike VYM’s 0.06%. While both funds are cheaper than other dividend ETFs in the market, you may want to argue that VYM’s higher expense ratio is justifiable because of its higher annual returns.
Taxes
Neither Vanguard nor Invesco identified any hidden charges, taxes, or tax advice associated with these funds, and they are both passively managed.
SPHD vs. VYM: Risk and Volatility
Both funds are exposed to the typical risks of the stock market and index-investing style risks. Other than this, SPHD and VYM are less risky, as expected of any high-quality ETF. The volatility comparison of both funds according to PortfoliosLab shows little or nothing to separate them. VYM’s 11.39% volatility is quite close to 11.71% recorded for SPHD.
SPHD vs. VYM: ESG Scores and Impact
Over 40% of the securities in SPHD’s portfolio have an ESG rating of AAA or AA (ESG Leaders), while 28% are rated ESG leaders in the case of VYM. Both funds will remain relatively stable even in the face of sudden fluctuations caused by environmental, social, and governance issues.
These ESG ratings are MSCI ESG Research LLC’s.
Final Words
Both the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) and Vanguard High Dividend Yield ETF (VYM) ETFs are popular dividend-oriented ETFs, holding dividend-yielding stocks in their portfolios. These stocks are known to distribute dividends regularly to their shareholders. This type of ETF is more popular among retail investors who are in the game for consistent income in the long run, including people close to retirement.
SPHD vs. VYM: Which is the better Dividend Equity ETF?
SPHD has been the better performer in dividend returns to investors over time. It’s not surprising, considering the portfolio comprises some of the highest dividend payers. However, that is about the only part where it has outperformed VYM. VYM will be a better choice if you are more concerned about growing your capital and if you are looking to earn more disbursements from your dividend-focused portfolio. VYM offers more security by choosing capital-preserving stocks as its major holdings. The weighting toward safer dividends and exposure to the broader market in VYM will do more to keep your capital safe from market fluctuations in the long run.
IMPORTANT: All the information I have provided in this article is for educational purposes only. They should never be taken as investment advice. I recommend consulting registered investment advisers for professional guidance.
Finally, if you enjoy this, there are a few more exciting asset reviews and comparisons on our website. Feel free to check them out.
Good luck!