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Creating wealth through the snowball method of passive income involves investing in assets that generate income and then allowing the returns from those investments to compound over time. Like a snowball rolling down a slope, the income generated from these investments gradually accumulates and gains momentum, creating a growing stream of passive income.
This approach is particularly effective for long-term wealth building and early retirement because it utilizes the power of compounding and establishes a self-sustaining financial system in which individuals can reinvest their dividends or diversify into additional income sources as their income increases. Ultimately, this leads to financial independence, early retirement, and the freedom to pursue personal passions without constantly trading time for money. Passive income snowballing offers a path to long-term financial security, freedom, and an improved quality of life that many people find highly appealing.
In this article, we will compare two popular ETFs that focus on dividend growth – WisdomTree US Quality Dividend Growth Fund ETF (NASDAQ:DGRW) and Vanguard High Dividend Yield Index Fund ETF Shares (NYSEARCA:VYM) – and provide our opinion on which one is superior. We will determine which one can help create a better passive income snowball.
VYM vs DGRW: Dividend Yield and Growth
VYM and DGRW both concentrate on stocks that pay dividends, but they have distinct approaches that have led to different investor outcomes over time. VYM invests in high-yield dividend stocks, resulting in a higher trailing twelve-month yield of 3.32% compared to DGRW’s 1.94%. This makes VYM more appealing to investors seeking maximum current income. However, both ETFs have a strong track record of dividend growth. VYM has increased its dividends by an average of 6.97%, 5.60%, and 5.25% annually over the last ten, five, and three years, respectively. On the other hand, DGRW has achieved growth rates of 7.43%, 7.17%, and an impressive 23.16% annually over the same time periods. While both growth rates are robust and exceed inflation, DGRW’s higher growth rate compensates for its lower current dividend yield. Consequently, VYM is attractive to those seeking high yield and inflation-beating dividend growth, whereas DGRW is more appealing to investors looking to maximize their passive income stream over time rather than focusing solely on the current dividend yield.
VYM vs DGRW: Total Return Potential
In terms of total return, DGRW has outperformed VYM over the last decade:
Data by YCharts
In fact, despite the past decade being very strong for the mega-cap-rich SPY, DGRW has even outperformed the S&P 500 (SPY) since its inception:
Data by YCharts
DGRW’s outperformance becomes even more impressive when considering the expense ratio. While VYM has a more cost-efficient expense ratio of 0.06%, making it one of the most affordable ETFs in its category, DGRW’s expense ratio is higher at 0.28%. However, given DGRW’s exceptional performance to date, its higher fee is justified.
VYM vs DGRW: Portfolio Structure
Although VYM and DGRW both focus on dividend-paying companies, their strategies differ. VYM leans towards companies with high dividend yields, making it suitable for investors seeking maximum current income. On the other hand, DGRW emphasizes dividend growth and targets companies that consistently increase their dividends over time. This strategy prioritizes long-term capital appreciation with some current dividend income.
Regarding sector allocation, DGRW places significant emphasis on the tech sector, reflecting the growth and dividend potential of tech giants. In contrast, VYM follows a broader sector diversification approach.
DGRW allocates the largest portion of its portfolio, 30.36%, to the technology sector, which aligns with its focus on high levels of dividend growth. Consumer defensive stocks make up the second-largest allocation at 16.51%, providing portfolio stability alongside the volatility of tech stocks. Industrials rank third at 14.15% allocation, followed by healthcare at 14.04%. Financials and consumer cyclical sectors have allocations of 11.60% and 9.17%, respectively, while smaller allocations ranging from 0.31% to 1.815% are dedicated to infrastructure, real estate, energy, utilities, and communications.
DGRW’s top 10 holdings consist of tech giants, consumer majors, and healthcare giants. Microsoft Corp. (MSFT) leads this group, followed by Apple Inc. (AAPL), emphasizing the significant role that mega-cap tech plays in DGRW’s portfolio. Broadcom Inc. (AVGO) and Cisco Systems Inc. (CSCO) further enhance DGRW’s technology performance.
Meanwhile, Johnson & Johnson (JNJ), Merck & Co. Inc. (MRK), and Procter & Gamble Co. (PG) provide exposure to healthcare and consumer staples, while Home Depot Inc. (HD), Walmart Inc. (WMT), and Coca-Cola Company (KO) contribute to the top 10 holdings as strong dividend producers in the consumer sector.
With 96% of its holdings having a market cap of $10 billion or more and a total of 297 individual holdings in its portfolio, DGRW boasts a well-diversified portfolio that is relatively low-risk. However, due to its heavy reliance on technology stocks, weakness in that sector could lead to underperformance for the ETF.
In contrast, VYM has the financial sector as its top allocation, making up 19.91% of the portfolio. Consumer defensive stocks account for the second-largest sector at 14.18%, followed by healthcare at 13.32%, and industrials and energy at 11.84% and 11.74%, respectively. Technology represents a much smaller allocation at 9.69%, significantly lower than DGRW’s allocation to the sector. The remaining sectors, including consumer cyclicals, utilities, communications, basic materials, and real estate, constitute smaller portions of VYM’s portfolio, ranging from 6.73% to 0.01%.
VYM’s top 10 holdings include Exxon Mobil Corp. (XOM) as the largest, followed by JPMorgan Chase & Co. (JPM), Johnson & Johnson, Procter & Gamble Co., and AbbVie Inc. (ABBV). Other components consist of Broadcom Inc., Home Depot Inc., Chevron Corp. (CVX), Merck & Co. Inc., and PepsiCo Inc. (PEP), with each position representing between 3.61% and 1.79% of the top 10 holdings.
VYM’s portfolio comprises 456 individual holdings, contributing to a well-balanced portfolio that contrasts with DGRW’s heavy reliance on mega-cap technology stocks.
VYM vs DGRW: Investor Takeaways
Both VYM and DGRW offer dividend growth rates that exceed inflation. However, the key factors to consider when deciding between the two are:
- VYM provides higher current income compared to DGRW, while DGRW offers faster dividend growth.
- VYM offers a more balanced sector allocation, while DGRW overweight large and mega-cap technology stocks.
- VYM has a lower expense ratio than DGRW, but DGRW’s heavy investments in technology stocks have delivered market-beating performance since inception.
In our opinion, mega-cap and large-cap technology stocks are currently overvalued. We believe VYM’s portfolio will outperform in a slower growth environment. Additionally, while DGRW’s high dividend growth rate may be suitable for young investors, those who aim to live off dividend income within a decade or less may find its low yield too small. Consequently, if building a powerful passive income snowball is your priority, we feel that VYM is the better choice to consider today.