Key insights
- The article compares VIG (dividend growth) and HDV (high yield) ETFs. VIG holds mega-cap tech with low yields but consistent dividend growth. HDV uses Morningstar screens for financial health and weights by total dividends paid. The choice depends on investor preference for growth vs. current income, but HDV's quality screen offers a potential advantage.
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 (VIG 0.28%) and the iShares Core High Dividend ETF (HDV +1.16%). 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.
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.
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.