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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 (VIG) and the Vanguard High Dividend Yield Index ETF (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 (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-dateAmountTTMY-on-Y TTM Growth
3/22/20130.3611.62620.9%
12/20/20120.4921.59320.0%
9/24/20120.4031.47616.7%
6/25/20120.371.38011.8%
3/26/20120.3281.34514.8%
12/21/20110.3751.32721.6%
9/23/20110.3071.26515.1%
6/24/20110.3351.23414.3%
3/25/20110.311.1724.9%
12/22/20100.3131.091-10.4%
9/24/20100.2761.099-13.3%
6/24/20100.2731.080-21.9%
3/25/20100.2291.117

-22.6%

Source: Yahoo!Finance, author calculations

VIG Historical Dividends
Ex-dateAmountTTMY-on-Y TTM Growth
3/22/20130.2881.42621.7%
12/20/20120.4981.4120.3%
9/24/20120.3231.2448.6%
6/25/20120.3171.2066.9%
3/26/20120.2721.1727.0%
12/21/20110.3321.17211.8%
9/23/20110.2851.14616.6%
6/24/20110.2831.12819.1%
3/25/20110.2721.09512.5%
12/22/20100.3061.0484.3%
9/24/20100.2670.983-4.7%
6/24/20100.250.947-12.5%
3/25/20100.2250.973-5.2%

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
PeriodVIGVYMSPY
Q1 201321.7%20.9%20.7%
Q4 201220.3%20.0%20.5%
Q3 20128.6%16.7%15.9%
Q2 20126.9%11.8%10.7%
Q1 20127.0%14.8%12.7%
Q4 201111.8%21.6%13.7%
Q3 201116.6%15.1%11.6%
Q2 201119.1%14.3%15.5%
Q1 201112.5%4.9%11.6%
Q4 20104.3%-10.4%4.1%
Q3 2010-4.7%-13.3%-4.5%
Q2 2010-12.5%-21.9%-15.3%

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
SectorSPYVYMVIG
Computer and Technology16.7%9.1%5.5%
Finance16.5%11.5%7.5%
Medical11.8%12.1%8.6%
Oils-Energy10.5%13.0%13.2%
Retail-Wholesale8.9%5.2%17.6%
Consumer Staples8.1%14.6%12.9%
Utilities5.9%13.7%1.5%
Consumer Discretionary4.8%2.0%2.9%
Conglomerates3.6%6.0%6.6%
Basic Materials3.1%3.8%8.3%
Industrial Products2.6%2.1%9.5%
Business Services2.5%1.7%1.7%
Transportation1.8%1.5%1.6%
Aerospace1.3%2.5%1.1%
Auto-Tires-Trucks1.2%1.1%0.5%
Construction0.7%0.1%1.1%

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 (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. (PEP), Procter & Gamble Co. (PG), and Coca-Cola Co. (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. (GE), United Technologies Corp. (UTX) and 3M Co. (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
TickerP/E
SDY16.4
VIG14.8
SPY14.8
DVY14.6
VYM13.9

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.

Source: Comparing Vanguard Dividend Stock ETFs

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.