Vanguard High Dividend Yield ETF Performance and Strategy

The Vanguard High Dividend Yield ETF (VYM) has returned 17% year-to-date through August 19, outpacing the 13% return of the S&P 500 [1]. This performance highlights a shift in market leadership as investors move toward mature, cash-generative businesses that trade at lower valuations than the growth-heavy index.

Valuation-driven rotation

The fund’s outperformance is rooted in its mechanical yield screen, which prioritizes companies with above-average payouts while effectively filtering out the high-multiple, growth-oriented firms that dominate the S&P 500 [1]. Because the screen excludes companies that reinvest capital rather than pay dividends, it removes most of the "megacap AI complex" before the portfolio is constructed [1]. This methodology results in a forward earnings multiple of approximately 16x for VYM, significantly lower than the 23x multiple commanded by the broader S&P 500 [1].

While the fund’s performance has been strong in the current year, its long-term track record remains behind the broader market. Over the last decade, VYM returned 207% compared to 252% for the S&P 500, a gap attributed to the fund's lack of significant exposure to high-growth technology names like Nvidia and Meta [1]. However, the five-year performance shows a narrowing gap, with VYM up 79% against the index’s 73%, as the rotation into value-oriented stocks began to gain momentum in 2022 [1].

Competitive landscape and income

For investors prioritizing higher current income, the Schwab U.S. Dividend Equity ETF (SCHD) offers a different approach. While VYM tracks the FTSE High Dividend Yield Index, the alternative fund follows the Dow Jones U.S. Dividend 100 Index, which screens for at least 10 consecutive years of dividend payments and ranks companies by cash flow to debt and return on equity [2]. This results in a higher trailing yield of approximately 3.36%, compared to VYM’s 2.25% [2].

Despite the yield difference, VYM remains a lower-cost option with an expense ratio of 0.04%, compared to 0.06% for the alternative [1, 2]. The choice between these vehicles often depends on whether an investor is seeking broad diversification across the dividend-paying half of the U.S. market or a more concentrated, quality-screened portfolio focused on income density [2].

What to watch

• Valuation Reversion: Monitor whether the valuation gap between the "cheapest half" of large-cap stocks and the expensive, growth-led index continues to favor value-tilted funds [1].
• AI Capex Cycle: Watch for signs of whether the AI-driven growth trade resumes leadership, which would likely cause VYM to trail the broader S&P 500 [1].
• Distribution Consistency: Track the quarterly dividend payouts, which have shown irregularity, to determine if the fund meets specific cash-flow requirements [1].

The current performance of VYM underscores a broader market pivot toward valuation-sensitive investing. Whether this trend persists depends on whether the market continues to reward cash-generative, mature businesses over the high-growth, AI-focused firms that have defined index returns since 2023.