The Truth About Dividend Yield and Dividend Growth ETFs

Contrary to popular belief, I don’t think dividends are irrelevant at all. When reinvested, they have contributed a significant share of total returns over time.

But at the same time, dividends create tax drag in taxable accounts, and many dividend ETFs have lagged broad market cap-weighted benchmarks over the last decade due to higher fees or missed exposure to growth stocks.

If you’re buying dividend ETFs as part of a buy-and-hold strategy, it makes sense to prioritize them in tax-sheltered accounts. But rather than focusing on the traditional “snowball” compounding narrative, I prefer to view them as affordable substitutes for factor ETFs.

Specifically, high-yield dividend ETFs can serve as a value tilt, while dividend growth ETFs often resemble quality strategies. Two of my favorite Vanguard dividend ETFs illustrate this well.

Vanguard High Dividend Yield ETF (VYM)

Investors are usually comfortable with value ETFs underperforming the broad market for long stretches, assuming a comeback will eventually arrive. Yet when a dividend ETF lags, many balk at the result, even though the underlying exposures can look very similar.

A good example is the Vanguard High Dividend Yield ETF (VYM). This fund tracks the FTSE High Dividend Yield Index, which excludes REITs, removes any company that hasn’t paid a dividend in the past 12 months or isn’t projected to, and then ranks the remaining stocks by forward dividend yield. Constituents are weighted by market capitalization.

That yield screen introduces an implicit value tilt. Dividend yield is calculated as annual dividends divided by share price. When share prices fall, yields rise, which means lower-priced—and often lower-valued—stocks are more likely to be included. It’s not a perfect proxy for value, but the connection is strong.

Over an 18.8-year backtest (2006-11-16 through 2025-09-12), the two funds posted nearly identical performance, with VYM actually edging out VTV on both a total return and risk-adjusted basis. In practical terms, that means investors who bought high-yield dividend ETFs may have benefited during stretches when the value factor rebounded.

A factor regression reinforces this link. VYM loads onto the HML, or high-minus-low factor, just as significantly as VTV does. VYM also achieves this exposure at an expense ratio of just 0.06%, making it one of the cheapest ways to hold a value-tilted portfolio.

The takeaway is that high dividend yield ETFs like VYM often function as value funds in disguise. Their stock screens and sector weights give them similar exposures to traditional value ETFs, which helps explain why their performance and factor loadings look so similar over time.

Vanguard Dividend Appreciation ETF (VIG)

A common misconception about dividend growth strategies from beginner investors is that they rely on a “snowball” effect where dividends buy more shares, which then pay more dividends, and the process compounds forever.

While that mechanism does work, it doesn’t consistently beat pure price appreciation, and it remains subject to tax drag. What makes dividend growth ETFs attractive isn’t the snowball, but the quality exposure they deliver. The Vanguard Dividend Appreciation ETF (VIG) is a good example.

It tracks the S&P U.S. Dividend Growers Index, which requires a 10-year history of dividend growth. It also excludes the top 25% of companies by yield, helping to avoid yield traps. No single stock can exceed 4% of the portfolio, and the fund rebalances quarterly.

This methodology favors companies with stable earnings, durable competitive advantages, and consistent cash flows, which are the type of businesses able to raise dividends year after year. But by also cutting out the highest yielders, VIG also filters away weaker companies at risk of dividend cuts. While branded as a dividend strategy, the index rules double as an effective quality screen.

In a backtest covering 7.6 years (2018-02-15 through 2025-09-12), VIG strongly outperformed the “brand name” Vanguard U.S. Quality Factor ETF (VFQY).

A factor regression explains why. VIG shows strong loadings on RMQ, or robust-minus-weak, which measures operational strength, and on CMA, or conservative-minus-aggressive, which reflects balance sheet prudence. VFQY, by contrast, shows no statistically significant exposure to the latter.

For investors, that means VIG quietly delivers a more reliable tilt to quality than a product marketed as a dedicated quality ETF, and it does so at just 0.05% in expenses, less than half the 0.13% charged by VFQY.