The Passive Income Snowball Path To Wealth: VYM Vs. DGRW

Alex Building wealth through the passive income snowball method involves investing in income-generating assets and then allowing the returns from those investments to compound over time. Similar to a snowball rolling downhill, the income generated by these investments gradually accumulates and gains momentum, generating an ever-increasing passive income stream. This approach is particularly powerful for building long-term wealth and retiring early because it leverages the power of compounding and creates a self-sustaining financial system in which – as the income grows – individuals can either reinvest their dividends or diversify into additional income-generating assets, ultimately leading to financial independence and the freedom to retire early, enjoy life on their terms, and pursue their passions without the constant need to trade time for money. As a result, passive income snowballs offer a path to long-term financial security, independence, and an improved quality of life that many find incredibly appealing. In this article, we are going to compare two popular dividend growth ETFs – the WisdomTree U.S. Quality Dividend Growth Fund ETF (NASDAQ:DGRW) and the Vanguard High Dividend Yield Index Fund ETF Shares (NYSEARCA:VYM) – and share our take on which one would make for a better passive income snowball. VYM Vs. DGRW: Dividend Yield & Growth VYM and DGRW both focus on dividend-paying stocks, but they have different approaches that have led to different results for investors over time. VYM invests in higher yielding dividend stocks and therefore has a higher trailing twelve month yield of 3.32% compared to DGRW’s 1.94%. This makes VYM more attractive for investors seeking to maximize current income. However, when it comes to dividend growth, both ETFs have strong track records. VYM has grown its dividend at annualized rates of 6.97%, 5.60%, and 5.25% over the past ten, five, and three years, respectively. DGRW, on the other hand, has grown its dividend at an annualized rate of 7.43% over the past three years, 7.17% over the past five years, and a whopping 23.16% over the past 10 years. While both growth rates are strong and come in well ahead of inflation, DGRW’s growth rate is clearly higher, helping to offset its lower current dividend yield. As a result, while VYM offers a higher yield for those seeking current income while still providing dividend growth that easily exceeds the rate of inflation, DGRW offers even better dividend growth, making it more appealing to those focused on maximizing growing their passive income stream rather than trying to maximize their current dividend yield. VYM Vs. DGRW: Total Return Potential In terms of total return track record, DGRW has massively outperformed VYM over the past decade: Data by YCharts In fact, it has even outperformed the S&P 500 (SPY) since its inception despite the past decade being a very strong one for mega-cap rich SPY: Data by YCharts DGRW’s outperformance is even more impressive when taking expense ratios into account. VYM is the more cost-efficient option with an expense ratio of just 0.06%, making it one of the most affordable ETFs in its category. DGRW, on the other hand has a meaningfully higher expense ratio of 0.28%, though this expense ratio still remains competitive with many other funds in the space. When considering its very strong performance thus far, it has justified its higher fee. VYM Vs. DGRW: Portfolio Composition While both VYM and DGRW focus on dividend-paying companies, their strategies differ. VYM leans towards companies with higher dividend yields, making it suitable for those seeking to maximize current income. On the other hand, DGRW emphasizes dividend growth, targeting companies that have consistently increased their dividends over time which in turn emphasizes long-term capital appreciation alongside some current dividend income. In terms of sector allocation, DGRW has a more significant emphasis on the tech sector, reflecting the growth and dividend potential of tech giants, whereas VYM takes on a broader sector diversification. DGRW’s largest sector by allocation is Technology, constituting 30.36% of its portfolio, which makes sense given its focus on driving high levels of dividend growth. Consumer Defensive stocks are its second largest allocation, coming in at 16.51% and enhancing the portfolio’s stability as a balance against the inherent volatility of tech stocks. Industrials come in third at 14.15% of the portfolio, followed closely by Health Care at 14.04%. Financials and Consumer Cyclical sectors have allocations of 11.60% and 9.17% respectively, while the remaining sectors-Basic Material, Real Estate, Energy, Utilities, and Communication-comprise smaller portions ranging from 0.31% to 1.815. DGRW’s top 10 holdings offer a blend of tech giants, consumer staples, and healthcare behemoths. Leading the pack is Microsoft Corp (MSFT), followed closely by Apple Inc (AAPL), underscoring the significant role that mega-cap tech plays in DGRW’s portfolio. Broadcom Inc (AVGO) and Cisco Systems Inc (CSCO) further bolster DGRW’s technology exposure. Meanwhile, Johnson & Johnson (JNJ), Merck & Co Inc (MRK), and Procter & Gamble Co (PG) provide healthcare and consumer staples exposure, while The Home Depot Inc (HD), Walmart Inc (WMT), and Coca-Cola Co (KO) round out the top 10 with strong, consumer facing dividend growers. DGRW Top 10 Holdings (Seeking Alpha) With 96% of its holdings having a market cap of $10 billion or greater and a total of 297 individual holdings in its portfolio, DGRW has a very well diversified portfolio that is quite low risk in nature. That being said, it is heavily overweight technology stocks, so weakness in that sector would likely lead to material underperformance for the ETF. Meanwhile, VYM has 19.91% exposure to Financials as its top sector by allocation. The second largest sector exposure is to Consumer Defensive stocks at 14.18%, Health Care stands at 13.32%, while the Industrials and Energy sectors occupy 11.84% and 11.74%, respectively, in VYM’s portfolio. Technology makes up 9.69% of the portfolio, a far smaller allocation to the sector than DGRW has. The remaining sectors – Consumer Cyclical, Utilities, Communication, Basic Material, and Real Estate – occupy much smaller portions of the portfolio, ranging from 6.73% to 0.01%. VYM’s top 10 holdings include Exxon Mobil Corp (XOM), followed by JPMorgan Chase & Co (JPM), Johnson & Johnson, Procter & Gamble Co, and AbbVie Inc (ABBV). Other constituents include Broadcom Inc, The Home Depot Inc, Chevron Corp (CVX), Merck & Co Inc, and PepsiCo Inc (PEP), with each of its top 10 positions ranging in size between 3.61% and 1.79%. VYM Top 10 Holdings (Seeking Alpha) Overall, VYM has 456 individual holdings, combining with its fairly well-balanced sector diversification to provide a very well-balanced portfolio that contrasts with DGRW’s heavier bet on mega-cap technology stocks. VYM Vs. DGRW: Investor Takeaway VYM and DGRW both offer investors inflation-beating rates of dividend growth. However, the major factors that need to be considered when deciding between the two are: VYM will deliver higher current income than DGRW, while DGRW will deliver faster dividend growth. VYM provides a more balanced sector allocation, while DGRW is 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 outperformance since inception. In our view, mega-cap and large-cap technology stocks are overvalued at the moment and we think that VYM’s portfolio will likely perform better in a slower growth environment. Moreover, while DGRW’s higher dividend growth rate may make it a good fit for a young investor, investors who are wanting to live off of dividend income within a decade or less may find its very low yield to be too low. As a result, if building a powerful passive income snowball is your priority, we think that VYM is the better buy today.

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