VYM vs DGRO: A Value Investor's 2026 Choice on Yield, Quality, and Margin of Safety

The choice between these two dividend ETFs comes down to a classic investment philosophy. VYM and DGRO are both low-cost, passive vehicles, but they are built on fundamentally different blueprints. This divergence shapes the entire investor experience.

VYM tracks the FTSE High Dividend Yield Index, which selects the top 440 U.S. stocks based solely on their current dividend yield. It's a pure value screen, aiming to capture the highest income available in the market. This approach results in a broad, diversified portfolio tilted toward sectors like consumer staples, energy, and industrials. The fund's structure is designed for stability, offering exposure to large-cap firms often considered some of the safest in the world. In essence, VYM is a portfolio of today's yield.

DGRO, by contrast, follows the Morningstar US Dividend Growth Index. Its mandate is different: to find companies with a proven history of increasing their dividends. This focus naturally leads to a more concentrated portfolio of firms that are not just paying dividends, but growing them. The index favors businesses with durable competitive advantages and management teams committed to returning capital to shareholders over time. DGRO is a portfolio of tomorrow's growth.

For a long-term value investor, this sets up the central question. Is the priority securing a high yield today, or betting on the compounding power of a company that consistently raises its payout? The value philosophy, as practiced by Buffett and Munger, places a premium on the margin of safety. This is the buffer between a stock's price and its intrinsic value. VYM's strategy of targeting the highest current yields inherently seeks this buffer. It often means buying into companies that may be overlooked or temporarily out of favor, where the yield itself acts as a form of compensation for the risk and a signal of undervaluation. The fund's broad diversification across 440 holdings further reduces the risk of any single company's failure.

DGRO's approach, while also focused on quality, prioritizes growth. Its higher concentration and focus on dividend increases can lead to better long-term total returns, as seen in its superior 10-year annualized performance. Yet, for a value investor, the margin of safety is more about the price paid relative to the asset's worth, not just the growth trajectory. The fund's lower expense ratio is a plus, but the core divergence is strategic.

The bottom line is that VYM's method of seeking today's yield aligns more directly with a disciplined, margin-of-safety philosophy. It's a portfolio built for the present, where the income stream itself is a tangible measure of value. DGRO is a portfolio built for the future, where the promise of growth is the primary driver. For the patient investor, the choice often comes down to whether they are more comfortable betting on a company's past and present stability, or its future potential.

Performance & Risk: The Quality of the Compounding Engine

When evaluating these two portfolios, the quality of the underlying holdings and the risk they carry are paramount. VYM's strategy of selecting the highest current yields leads to a broad index tilted heavily toward consumer, energy, and industrials. This provides a foundation of stability, as these are often large, established firms. Yet, it also introduces cyclical vulnerability. When economic growth slows, demand for energy and industrial goods can soften, and consumer staples may see margin pressure. This tilt means the fund's performance is more closely tied to the fortunes of these sectors, which can be a source of both resilience and constraint.

DGRO's portfolio tells a different story. Its focus on companies with a history of raising dividends naturally gravitates toward firms with durable competitive advantages and consistent earnings power. The top holdings-like Microsoft and Apple-are emblematic of this higher-quality, growth-oriented approach. While these are not traditional "value" stocks in the classic sense, they represent a different kind of quality: the ability to compound earnings and returns over decades. This shift in portfolio quality is reflected in risk metrics. DGRO's Sharpe ratio of 0.91 is slightly higher than VYM's 0.88, suggesting it has generated a marginally better return per unit of total risk over time. More telling is the drawdown data: DGRO's maximum drawdown of -35.10% is significantly less severe than VYM's -56.98%, indicating its holdings have historically been less volatile during market stress.

The funds also differ in concentration. VYM's index includes roughly 440 holdings, which provides broad diversification. Its top 10 holdings make up about 28% of assets, a reasonable level for a large-cap fund. DGRO, with 404 holdings, is similarly diversified. However, the quality of those holdings is what defines the risk profile. VYM's approach seeks a margin of safety through yield and breadth, while DGRO's seeks it through business quality and growth consistency.

Finally, there is a minor but meaningful cost difference. VYM's expense ratio of 0.06% is lower than DGRO's 0.08%. For a long-term investor, this is a small but real drag on returns. Over decades, the compounding effect of this difference can be meaningful, though it is dwarfed by the impact of the underlying portfolio's quality and growth trajectory.

The bottom line is that DGRO's portfolio is built for smoother, higher-quality compounding, as evidenced by its superior risk-adjusted returns and less severe drawdowns. VYM's portfolio offers a broader, more cyclical exposure, which may provide a higher current yield but comes with greater volatility. For a value investor, the choice hinges on whether they view business quality and growth consistency as the ultimate source of a margin of safety, or if they prefer the buffer provided by a high current yield in a more stable, if potentially slower-growing, set of industries.

Valuation & Quality: Assessing the Margin of Safety

The core of any value decision lies in the margin of safety-the buffer between price and intrinsic value. Both VYM and DGRO are passively managed, which means they carry minimal active risk. Their distinct methodologies, however, create different exposures to valuation and quality.

VYM's high yield is a direct function of its index rules. The fund selects companies based solely on their current yield, with only the highest-yielding firms chosen. This approach often leads investors to firms that are temporarily out of favor or facing sector-specific headwinds. The yield itself acts as a form of compensation, and the broad diversification across roughly 440 holdings provides a margin of safety through breadth. The portfolio's tilt toward consumer, energy, and industrials reflects this value-oriented, cyclical bias. For a value investor, this is the classic playbook: buy a wide net of stable, high-yielding firms where the yield signals potential undervaluation.

DGRO's focus on dividend growth implies a different quality and a higher valuation. The index seeks companies with a proven track record of raising payouts, which naturally gravitates toward firms with durable competitive advantages and consistent earnings power. This results in a portfolio that includes high-quality, growth-oriented businesses like Microsoft and Apple. While this quality can lead to smoother compounding, it also means these holdings typically command a premium. In a rising rate environment, where future cash flows are discounted more heavily, this premium can make DGRO's holdings less attractive. The fund's superior 10-year performance reflects the power of compounding, but it also suggests a higher price paid for that growth.

The bottom line is that the two funds offer different paths to safety. VYM's safety is found in the yield and the stability of its broad, value-skewed portfolio. DGRO's safety is found in the quality and growth consistency of its holdings, but it comes at a higher price. For a disciplined value investor, the choice is about which source of margin of safety they find more compelling: the tangible income stream of today, or the promise of a higher-quality business growing its payout tomorrow.

Catalysts & What to Watch for 2026

The coming year will test the core theses of both funds. For VYM, the primary catalyst is the trajectory of interest rates. Its high-yield, value-heavy portfolio is sensitive to a sustained rise in rates, which can pressure the valuations of its cyclical holdings in consumer, energy, and industrials. A shift toward a more stable, lower-rate environment would likely support the fund's yield advantage and its value-oriented stability. The broader market's tilt toward value or growth will be the overarching catalyst for relative performance.

For DGRO, the watchpoint is the sustainability of dividend growth in its top holdings. The fund's portfolio includes major technology and healthcare firms, where growth can be more volatile. Investors should monitor whether these leaders can continue to raise payouts through economic cycles, as this is the index's defining mandate. Any sign of a broad-based slowdown in dividend increases from its core holdings would challenge the fund's growth thesis.

The bottom line is that 2026 will be a year of validation or re-evaluation. VYM's thesis depends on the market rewarding its high current yield and stable, cyclical profile. DGRO's thesis depends on the continued compounding power of its high-quality, growth-oriented businesses. For the value investor, the key is to watch these catalysts and ensure the margin of safety remains intact.