Most investors feel like they have to choose between high yields and soaring stock prices. Dividend stocks usually provide more stability, while growth stocks come with more risk but also higher potential returns.
However, two Vanguard exchange-traded funds (ETFs) offer a healthy blend of growth and dividends. You can generate cash flow while achieving competitive returns with these funds.
Vanguard Dividend Appreciation Index Fund ETF
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The Vanguard Dividend Appreciation Index Fund ETF (VIG +0.15%) has a 1.6% yield and an annualized 13% return during the past 10 years. The fund has more than 300 holdings and prioritizes large-cap stocks.
Vanguard Dividend Appreciation ETF
Today’s Change
(0.15%) $0.33
Current Price
$221.59
Key Data Points
Market Cap
$0B
Day’s Range
$221.33 – $222.60
52wk Range
$169.32 – $222.81
Volume
37
Avg Vol
0
Gross Margin
0.00%
Dividend Yield
N/A
Its largest holdings are dividend growth stocks that have low yields but impressive growth rates. Broadcom, Microsoft, and Apple are the top three holdings, and they all have yields below 1%.
The fund also has higher-yielding stocks in its top 10, such as JPMorgan Chase and ExxonMobil. Tech stocks make up roughly 30% of the fund’s total assets. Those stocks contribute to the portfolio’s high growth rates.
The ETF also allocates more than 20% of its capital to financial stocks, including bank stocks that tend to have higher yields. Healthcare and industrial stocks are also well represented, which helps prop up the yield.
Vanguard High Dividend Yield Index Fund ETF
The Vanguard High Dividend Yield Index Fund ETF (VYM +0.07%) is another ETF that combines a solid yield with long-term growth. The fund has more than 500 holdings, with some overlap in the top 10 holdings, including Broadcom, JPMorgan Chase, and ExxonMobil.
The ETF places a stronger emphasis on financial stocks than tech stocks, as both sectors make up 21% and 18% of the fund’s total assets, respectively.
Vanguard Whitehall Funds – Vanguard High Dividend Yield ETF
Today’s Change
(0.07%) $0.10
Current Price
$145.21
Key Data Points
Market Cap
$0B
Day’s Range
$145.09 – $145.97
52wk Range
$112.05 – $145.97
Volume
197
Avg Vol
0
Gross Margin
0.00%
Dividend Yield
N/A
Large-cap value stocks make up half of the fund’s total assets, offering more stability than small-cap and mid-cap ETFs. The fund has a 2.5% yield that pairs with a low 0.06% expense ratio.
Healthcare, consumer staples, and industrial stocks each make up more than 10% of the fund’s total assets. The stronger focus away from tech has contributed to the ETF having a higher yield than the Vanguard Dividend Appreciation Index Fund.
Building passive income with dividend ETFs
The funds are two of the best dividend ETFs for investors who want cash flow and long-term appreciation. Although growth stocks offer flashier returns and more dramatic price movements due to significant momentum, dividend ETFs offer a slow and steady approach.
If you put $10,000 into the Vanguard Dividend Appreciation Index Fund at a 1.6% yield, you will earn $160 per year. Investing the same amount into the Vanguard High Dividend Yield Index Fund translates into $250 per year based on its 2.5% yield.
That amount of cash flow won’t change your life, but gradually investing more money into these funds each year will increase your total dividends. Shareholders can also reinvest their dividends to build their positions and receive more passive income each quarter.
If you build up to a $1 million position, the funds will produce $41,000 in dividend income per year. Compounding becomes far more meaningful at these levels. Your cash flow and total gains increase much quicker as your portfolio grows. Combining annual dividend income with Social Security and other income streams makes it easier to enjoy a smooth retirement.
Dividend investing requires a long-term outlook of multiple decades to live off cash flow. Investors can pick ETFs with higher yields, but those same funds tend to underperform the S&P 500. Picking funds with high yields often involves sacrificing higher returns since growth stocks like Broadcom, Microsoft, and Apple aren’t part of those funds.
However, if you only invest in growth stocks, you won’t receive much cash flow for holding shares, making your gains rely exclusively on stock price appreciation. Dividend ETFs like these two Vanguard funds offer an appealing balance.
