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Dividend Investing: A Signal of Strength

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  Published in Stocks and Investing on Wednesday, January 21st 2026 at 14:41 GMT by The Motley Fool
      Locale: UNITED STATES, IRELAND

The Enduring Appeal of Dividend Investing

Dividend investing isn't merely about receiving regular payments; it's a signal of financial strength and commitment. Companies that consistently pay and, ideally, increase dividends often demonstrate a strong balance sheet, profitability, and a desire to share success with shareholders. Historically, dividend-paying companies have shown resilience during market downturns, and their total returns (combining dividend income and capital appreciation) have often surpassed those of non-dividend-paying stocks.

Enter Dividend ETFs: Diversification and Convenience

While researching and managing a portfolio of individual dividend stocks can be rewarding, it demands significant time and expertise. Dividend ETFs offer a significantly more accessible and diversified approach. These funds allow investors to gain exposure to a broad basket of dividend-paying companies with a single transaction, mitigating the risk associated with picking individual stocks.

Vanguard High Dividend Yield ETF (VYM): The Broad, Low-Cost Approach

The Vanguard High Dividend Yield ETF (VYM) remains a stalwart in the dividend ETF landscape. Tracking a broad index of U.S. companies with high dividend yields, VYM boasts impressive diversification, holding over 400 stocks. This broad diversification significantly reduces the impact of any single stock's performance on the overall fund. The expense ratio of just 0.06% is exceptionally competitive, meaning more of your investment stays working for you. As of early 2026, VYM's dividend yield hovers around 3.5%, reflecting current market conditions and interest rates. While past performance is no guarantee, VYM has historically demonstrated a consistent record of outperforming the broader market on a total return basis.

iShares Select Dividend ETF (DVY): Targeting Higher Yields

The iShares Select Dividend ETF (DVY) takes a slightly different approach. Instead of a broad index, DVY focuses on U.S. companies with a history of consistent dividend payments. This more concentrated strategy - holding around 100 stocks - aims to deliver a higher dividend yield. However, this concentration also means DVY tends to be more volatile than VYM. Currently, DVY's dividend yield sits in the 3.8% to 4.8% range. The expense ratio is 0.39%, higher than VYM's, but still considered reasonable within the ETF space. The increased volatility is a trade-off for the potential of a higher yield.

Choosing the Right ETF for Your Strategy

The "best" ETF depends on individual investor preferences and risk tolerance. For investors prioritizing diversification and low costs, VYM remains the ideal choice. Its broad exposure and minuscule expense ratio make it a cornerstone of many passive income portfolios. For those comfortable with slightly higher volatility and seeking a potentially higher yield, DVY offers a compelling alternative.

Strategic Allocation: Combining Strengths

A particularly prudent approach involves splitting a $2,000 investment between VYM and DVY. This strategy allows investors to capture the benefits of both ETFs: the broad diversification and low cost of VYM, combined with the potential for a higher yield from DVY. A 60/40 split (VYM/DVY) or a 50/50 split are common choices, but ultimately the allocation should reflect your personal risk profile.

A Buy-and-Hold Approach for Perpetual Income

The beauty of dividend ETFs lies in their suitability for a buy-and-hold strategy. Reinvesting dividends can accelerate wealth accumulation through the power of compounding. Over time, as companies grow and potentially increase their dividend payouts, your income stream will expand, creating a truly passive income source. Regular review of the ETFs' performance is recommended, but frequent trading is generally unnecessary and can erode returns.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Investment decisions should be based on your individual circumstances and consultation with a qualified financial advisor.