The Power of Compounding in Dividend ETFs: How VYM Builds Multimillion-Dollar Portfolios

The power of compounding is one of the most transformative forces in investing, yet its true potential is often underappreciated. For long-term investors, dividend ETFs like the Vanguard High Dividend Yield ETF (VYM) offer a compelling case study in how disciplined reinvestment can quietly generate wealth over decades. By leveraging consistent dividend payouts and compounding returns, even modest initial investments can grow into multimillion-dollar portfolios.

VYM: A Blueprint for Compounding Wealth

VYM, launched in November 2006, tracks the FTSE High Dividend Yield Index, which emphasizes large-cap U.S. stocks with a history of paying consistent dividends. Over nearly two decades, VYM has delivered a cumulative total return of 415.84%, translating to an average annualized return of approximately 9.00%. This performance is driven by a combination of capital appreciation and reinvested dividends, which amplify returns over time.

A critical factor in VYM's success is its dividend growth trajectory. While the fund did not pay dividends until 2012, it has since demonstrated steady increases, with annualized forward dividend yields reaching 2.4% as of December 2025. For example, a $10,000 investment in VYM in 2006, with dividends reinvested, would have grown to approximately $51,554 by 2025. This exponential growth underscores the compounding effect: reinvested dividends generate additional shares, which in turn produce more dividends, creating a self-reinforcing cycle.

The Long-Term Magic of Reinvestment

The true power of compounding becomes evident over extended horizons. Consider a 30-year scenario: an initial $10,000 investment in VYM, assuming a historical annualized return of 10.1%, could grow to nearly $163,000. Adding regular monthly contributions of $100 further accelerates growth, potentially yielding $345,000 over the same period. These figures highlight how even small, consistent inputs-when paired with reinvestment-can lead to substantial wealth accumulation.

For a more dramatic illustration, a $1,000,000 investment in VYM in 2006, with dividends reinvested, could surpass $10 million by 2050 if the fund maintains a similar return profile. This projection assumes a 9% annualized return, a conservative estimate given VYM's historical performance. The key takeaway is that compounding thrives on time; the longer an investor holds the ETF, the more pronounced the exponential growth becomes.

VYM's Competitive Edge

VYM's appeal lies in its low-cost structure and focus on high-quality, dividend-paying companies. With an expense ratio of 0.06%, it minimizes drag on returns, preserving compounding potential. The fund's portfolio includes industry leaders like Exxon Mobil, JPMorgan Chase, and Broadcom, which have demonstrated resilience and consistent payouts. While VYM's 2.4% yield is modest compared to some alternatives (e.g., Schwab's SCHD at 3.3%), its emphasis on large-cap stability and diversification reduces volatility, making it ideal for long-term, income-focused investors.

However, VYM's performance has historically lagged behind broader market indices like the S&P 500 (VOO), which has delivered closer to 12% annualized returns over the same period. This gap is partly due to VYM's underweight in high-growth sectors like technology. Yet, for investors prioritizing income and downside protection, VYM's value tilt-concentrated in utilities, financials, and industrials-provides a counterbalance to market swings.

Strategic Considerations for Investors

To maximize compounding, investors should prioritize reinvesting dividends and holding VYM in tax-advantaged accounts, as dividend income is subject to taxation. Additionally, pairing VYM with growth-oriented ETFs can create a balanced portfolio that leverages both income and capital appreciation. Regular contributions, even in small amounts, further enhance compounding by increasing share ownership over time.

Conclusion

The Vanguard High Dividend Yield ETF exemplifies how disciplined, long-term investing in dividend ETFs can quietly build multimillion-dollar portfolios. By harnessing the compounding effect-through reinvestment, time, and low-cost structure-investors can transform modest sums into substantial wealth. While VYM may not chase the highest yields or fastest-growing stocks, its focus on stability and consistency makes it a cornerstone for those seeking passive, compounding-driven growth.