2 Solid Dividend Index Funds That Are Proven Moneymakers to Buy Now and Hold Forever | The Motley Fool (2024)

Dividend stocks offer passive income that many investors find desirable. But buying individual dividend stocks requires work. At the very least, shareholders should monitor the financial strength of the underlying business to ensure its dividend payments are sustainable, and that can be quite time-consuming.

Investors can save themselves some trouble with two exchange-traded funds (ETFs): the Vanguard High Dividend Yield ETF (VYM -0.17%) and the Vanguard Dividend Appreciation ETF (VIG -0.12%). Both index funds offer exposure to a diversified basket of dividend stocks, and they have consistently made money for patient shareholders over time.

Here are the details.

1. Vanguard High Dividend Yield ETF

The Vanguard High Dividend Yield ETF measures the performance of 462 large-cap value stocks that are forecast to have above-average dividend yields. The index fund spreads capital across 10 of the 11 market sectors, with real estate being the lone exclusion.

The top five positions in the ETF by percentage are:

1. ExxonMobil: 3.2%
2. Johnson & Johnson: 3.2%
3. JPMorgan Chase: 3.2%
4. Procter & Gamble: 2.7%
5. Broadcom: 2.6%

Compared to the S&P 500 (SNPINDEX: ^GSPC) index, the Vanguard High Dividend Yield ETF leans less heavily on cyclical sectors like technology and consumer discretionary, and more heavily on defensive sectors like consumer staples and utilities. The downside of that asset allocation is long-term underperformance, but the upside is reduced volatility.

Here are a few relevant metrics:

• Dividend yield: 3.2%
• 10-year total return: 152%
• 10-year beta: 0.86

The ETF last paid a quarterly dividend of $0.87 per share on June 23, and the current yield of 3.2% is double the 1.48% of the Vanguard S&P 500 ETF.

But yield is only part of the equation where total returns are concerned; share-price appreciation also plays a role. The Vanguard High Dividend Yield ETF returned a total 152% over the last decade (9.7% annually), while the S&P 500 returned 220% (12.3% annually). But the upside for the ETF's shareholders was lower volatility, as evidenced by its 10-year beta of 0.86.

Here's the bottom line: This index fund is a great option for investors who want (1) exposure to value stocks, (2) sizable dividends, and (3) below-average volatility.

2. Vanguard Dividend Appreciation ETF

The Vanguard Dividend Appreciation ETF measures the performance of 314 large-cap stocks that have historically grown their dividends each year. Whereas the previous index fund is primarily diversified across value stocks, this one offers exposure to value stocks and growth stocks across the same 10 market sectors.

The top five positions in the Vanguard Dividend Appreciation ETF by percentage are:

1. Microsoft: 4.8%
2. Apple: 4.7%
3. UnitedHealth Group: 3.2%
4. JPMorgan: 3.1%
5. Johnson & Johnson: 2.9%

In terms of sector allocation, the Vanguard Appreciation ETF splits the difference between the S&P 500 index and the Vanguard High Dividend Yield ETF. It leans away from cyclical sectors and into defensive sectors to a greater extent than the S&P 500, but to a lesser extent than the Vanguard High Dividend Yield ETF. The upshot is middle-of-the-road performance.

Here are a few relevant metrics:

• Dividend yield: 1.83%
• 10-year total return: 182%
• 10-year beta: 0.87

The Vanguard Dividend Appreciation ETF last paid a quarterly dividend of $0.77 per share on July 5, and the current yield of 1.83% is slightly higher than the 1.48% from the Vanguard S&P 500 ETF, but much lower than the 3.2% on the Vanguard High Dividend Yield ETF.

Yet, the Vanguard Dividend Appreciation ETF still returned 182% over the last decade (10.9% annually). That trails the 220% total return of the S&P 500, but it tops the 152% total return of the Vanguard High Dividend Yield ETF. Somewhat surprisingly, the Vanguard Dividend Appreciation ETF shows a 10-year beta of 0.87, meaning it has been just a little more volatile than the Vanguard High Dividend Yield ETF over the last decade despite its inclusion of growth stocks.

Here's the bottom line: This index fund is a great option for investors who want (1) exposure to value stocks and growth stocks, (2) above-average dividends, and (3) below-average volatility.