Dividend stocks and exchange-traded funds, or ETFs, are more popular investments when markets are volatile, uncertain, or expected to decline or flatline.
Right now, the market has been somewhat volatile, and with the elections around the corner, that is expected to continue. Also, while it is impossible to know for sure what markets will do, markets, large caps in particular, are overvalued and that could result in additional volatility and uncertainty.
Dividend ETFs are typically not high-fliers, but the extra income they generate can boost returns for investors and provide some stability. Here are two Vanguard ETFs that could be solid options for investors looking for balance, good dividends, and solid returns.
1. Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation Index Fund ETF Shares (NYSE:VIG) is the largest dividend ETF on the market with nearly $86 billion in assets. It is an ETF that tracks the performance of the S&P U.S. Dividend Growers Index, which consists of stocks of companies with a history of increasing their dividends.
The portfolio includes 337 stocks, mostly large caps, with a median market cap of $197 billion. The stocks in the portfolio are weighted in the same proportion as they are in the index, with Apple (NASDAQ:AAPL), Broadcom (NASDAQ:AVGO), and Microsoft (NASDAQ:MSFT) currently constituting the three largest positions. Information technology stocks make up 23% of the portfolio, followed by financials at 20%.
The ETF currently pays out a dividend of 85 cents per share, at a yield of 1.65%. That is higher than the average yield on the S&P 500 of 1.32%.
While it does not have the highest yields among Vanguard ETFs, it has excellent returns. As of Sept. 30, the ETF has returned 17.8% year-to-date (YTD), and it has a 30% one-year return, with the dividend reinvested. It also boasts a robust 12.7% five-year average annualized return and a 12.1% 10-year average annualized return.
2. Vanguard High Dividend Yield ETF
Vanguard is one of the most popular managers of dividend ETFs, with the above mentioned as the largest and the Vanguard High Dividend Yield Index Fund ETF Shares (NYSE:VYM) ranking as the third largest dividend ETF with approximately $58 billion in assets.
In contrast to the Vanguard Dividend Appreciation ETF, the Vanguard High Dividend Yield ETF typically pays out higher dividends but has lower returns. This ETF tracks the FTSE High Dividend Yield Index, which includes stocks with a history of paying out above-average dividends. So, it focuses on high dividends, as opposed to consistently growing dividends, even if they are lower in nature.
In the most recent quarter, it paid out a dividend of 85 cents, but it has a significantly higher yield of 2.65%. The yield represents the percentage of the annual share price that is paid out in dividends, so the higher the yield, the higher the dividend distribution per investment.
This ETF consists of more stocks than the other option, about 550, with a median market cap of $141 billion. The three largest holdings are Broadcom Inc (NASDAQ:AVGO), JPMorgan Chase (NYSE:JPM), and Exxon Mobil (NYSE:XOM). About 21% of the portfolio is in financial stocks, while roughly 13% are in industrials.
This ETF includes fewer technology stocks, so while that results in a higher yield, it has a slightly lower average annual returns than the other Vanguard dividend ETF.
Specifically, the ETF is up 17.3% YTD and 28% over the past 12 months. Further, it has a five-year annualized return of 11.1% and a 10-year annualized return of 10.2%, as of September 30.
Which is the better option?
These are two excellent dividend ETFs because they are quite different, and because each have been strong performers. If you are looking for income distributions to put in your pocket each quarter, the Vanguard High Dividend Yield ETF might be the better option with a higher yield, but if you are looking to reinvest the dividends back into the funds to generate higher returns, than the Vanguard Dividend Appreciation ETF might be slightly better.
But the difference in returns is not that substantial, so, among these two excellent dividend ETFs, the Vanguard High Dividend Yield ETF might be the slightly better option with comparable returns, less volatility, and a higher yield.