Comparing Vanguard Dividend Stock ETFs

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 |  Includes: DVY, SDY, SPY, VIG, VYM
by: Bennington Investment Ideas

Vanguard is a well known leader for cost effective investment solutions for retail investors. I've been using their products for almost 10 years now. Vanguard offers two well known dividend stock ETFs: the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) and the Vanguard High Dividend Yield Index ETF (NYSEARCA:VYM). These ETFs provide above market yields with potential upside. This past Friday (June 14), VIG closed at $67.72, with a trailing twelve month dividend of about $1.43, which provides a yield of 2.1%. In comparison, VYM closed at $57.36 with a trailing twelve month dividend of about $1.63, offering a yield of 2.8%. The SPDR S&P 500 Trust ETF (NYSEARCA:SPY), as a proxy for the broader market, closed at $163.18 with a trailing twelve month dividend of about $3.18, offering a yield of 1.9%. In terms of holdings, VIG has 147 stocks, while VYM has almost 400.

Vanguard ETFs Have Had Inconsistent Dividend Growth

Many companies pride themselves on establishing a historical track record of dividend increases. Some companies have very consistently raised their dividends every year. However, a dividend stock ETF often carries exposure to a range of sectors, which can result in inconsistent dividend increases. The following tables show the historical dividends and associated growth rates for both Vanguard ETFs.

VYM Historical Dividends
Ex-date Amount TTM Y-on-Y TTM Growth
3/22/2013 0.361 1.626 20.9%
12/20/2012 0.492 1.593 20.0%
9/24/2012 0.403 1.476 16.7%
6/25/2012 0.37 1.380 11.8%
3/26/2012 0.328 1.345 14.8%
12/21/2011 0.375 1.327 21.6%
9/23/2011 0.307 1.265 15.1%
6/24/2011 0.335 1.234 14.3%
3/25/2011 0.31 1.172 4.9%
12/22/2010 0.313 1.091 -10.4%
9/24/2010 0.276 1.099 -13.3%
6/24/2010 0.273 1.080 -21.9%
3/25/2010 0.229 1.117

-22.6%

Click to enlarge

Source: Yahoo!Finance, author calculations

VIG Historical Dividends
Ex-date Amount TTM Y-on-Y TTM Growth
3/22/2013 0.288 1.426 21.7%
12/20/2012 0.498 1.41 20.3%
9/24/2012 0.323 1.244 8.6%
6/25/2012 0.317 1.206 6.9%
3/26/2012 0.272 1.172 7.0%
12/21/2011 0.332 1.172 11.8%
9/23/2011 0.285 1.146 16.6%
6/24/2011 0.283 1.128 19.1%
3/25/2011 0.272 1.095 12.5%
12/22/2010 0.306 1.048 4.3%
9/24/2010 0.267 0.983 -4.7%
6/24/2010 0.25 0.947 -12.5%
3/25/2010 0.225 0.973 -5.2%
Click to enlarge

Source: Yahoo!Finance, author calculations

So both ETFs seem to have solid dividend growth (despite the variation); however, VIG dividends declined less immediately following the Great Recession. Furthermore, VIG (remember that its name includes "Dividend Appreciation") had lower dividend growth than VYM for most quarters in 2012. The following table will place this in better context by comparing the TTM year-on-year growth rates of VIG with VYM and SPY.

TTM Dividend Growth
Period VIG VYM SPY
Q1 2013 21.7% 20.9% 20.7%
Q4 2012 20.3% 20.0% 20.5%
Q3 2012 8.6% 16.7% 15.9%
Q2 2012 6.9% 11.8% 10.7%
Q1 2012 7.0% 14.8% 12.7%
Q4 2011 11.8% 21.6% 13.7%
Q3 2011 16.6% 15.1% 11.6%
Q2 2011 19.1% 14.3% 15.5%
Q1 2011 12.5% 4.9% 11.6%
Q4 2010 4.3% -10.4% 4.1%
Q3 2010 -4.7% -13.3% -4.5%
Q2 2010 -12.5% -21.9% -15.3%
Click to enlarge

Source: Yahoo!Finance, author calculations

This shows that SPY dividends have had stronger historical growth than VIG, and comparable but slightly less than VYM.

Sector Allocations Show Some Differences Among These ETFs

Dividend growth is often related to sector allocations in the ETFs. As noted in my previous article, some Dividend Stock ETFs juice their yield by taking the highest yielding sectors and creating a significant concentration. The following table compares the sector value allocations of the two Vanguard ETFs relative to SPY.

Sector Allocations
Sector SPY VYM VIG
Computer and Technology 16.7% 9.1% 5.5%
Finance 16.5% 11.5% 7.5%
Medical 11.8% 12.1% 8.6%
Oils-Energy 10.5% 13.0% 13.2%
Retail-Wholesale 8.9% 5.2% 17.6%
Consumer Staples 8.1% 14.6% 12.9%
Utilities 5.9% 13.7% 1.5%
Consumer Discretionary 4.8% 2.0% 2.9%
Conglomerates 3.6% 6.0% 6.6%
Basic Materials 3.1% 3.8% 8.3%
Industrial Products 2.6% 2.1% 9.5%
Business Services 2.5% 1.7% 1.7%
Transportation 1.8% 1.5% 1.6%
Aerospace 1.3% 2.5% 1.1%
Auto-Tires-Trucks 1.2% 1.1% 0.5%
Construction 0.7% 0.1% 1.1%
Click to enlarge

Source: Data provided by Zacks.com, Vanguard, and author calculations.

In comparing these sector allocations, one can note several differences among VIG, VYM and SPY. Once again, as expected, both Vanguard ETFs are dramatically underweight in the Computers & Technology sector. They are also underweight in Finance and Consumer Discretionary.

If you recall my previous article that looked at iShares Dow Jones Select Dividend Index (NYSEARCA:DVY) and SPDR S&P Dividend ETF (SDY), there is an interesting comparison. While both SDY and DVY were underweight in Energy-Oils by substantial margin, both VIG and VYM are overweight in this sector. VIG has a 13.2% of its assets and VYM is at 13.0% relative to the market at 10.5%.

Both VYM and VIG are also overweight in Consumer Staples, which makes sense, as well as Conglomerates. VIG's top three holdings based on March 30, 2013 share counts are Pepsico Inc. (NYSE:PEP), Procter & Gamble Co. (NYSE:PG), and Coca-Cola Co. (NYSE:KO). In contrast, VYM has these three as well, but they are ranked, 16th, 6th and 11th respectively. VYM conglomerate exposure is through General Electric Co. (NYSE:GE), United Technologies Corp. (NYSE:UTX) and 3M Co. (NYSE:MMM). VIG does not have GE, but does have the other two and three smaller firms as well. It is slightly surprising to see small VIG with fewer holdings have more in a specific sector than VYM.

The differences between VYM and VIG are also clear from this table. VYM favors utilities to maintain its current dividend yield while VIG shuns them. VYM has a slight bias towards the Medical sector, while VIG has a clear underweight here. VIG favors Retail-Wholesale, while VYM is underweight here.

Bottom Line

VYM and VIG offer additional options in the Dividend Stock ETF universe, but provide a lower yield than DVY. VYM is a highly diversified ETF (substantially more holdings than VIG, SDY or DVY) that offers a higher yield than the market and a comparable yield to SDY. Furthermore, in recent years, it has shown higher dividend growth than SPY. However, it has a much lower P/E ratio than both SDY and SPY. I see VYM as a more value-oriented substitute for SDY, with the added boost of good growth.

Forward P/E Ratios
Ticker P/E
SDY 16.4
VIG 14.8
SPY 14.8
DVY 14.6
VYM 13.9
Click to enlarge

Source: Data provided by Zacks.com, Vanguard, and author calculations. P/E is a forward looking P/E.

VIG appears to also provide good value with a comparable P/E ratio to the broader market. Furthermore, it offers a slightly better yield than the market. Based on this analysis VIG is more appropriate for investors looking for slight differences to the market. I see VIG as more of a substitute for SPY for investors looking for a little extra income. Between these two ETFs, I see VYM as the better choice due to its lower P/E ratio and higher yield.

Disclosure: I am long SPY, SDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.