Dividends and Dragons: A Skeptic’s View

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Vanguard and Fidelity. The names ring with the authority of ancient guilds, don’t they?1 They manage sums of money so vast they make dragons look like petty hoarders, and offer access to the hallowed art of dividend-seeking. Almost any financial goal, they claim. Which, translated from Marketing Elvish, means ‘we’ll take a cut of whatever you’re trying to achieve.’ Both offer Exchange Traded Funds, or ETFs – little packets of shares, conveniently wrapped for the modern investor. Though, when it comes to actual innovation in dividend strategies, you find yourself searching for a unicorn in a stable of particularly glum ponies.

The Vanguard Offerings: A Quest for Consistency (and Not Much Else)

The Vanguard Dividend Appreciation ETF (VIG) is, on the surface, a sensible sort of fund. It seeks companies that have consistently increased their dividends for at least ten years. A noble goal, certainly. Though it then rather spoils the effect by discarding the highest yields. Why? Because apparently, a good dividend is one that doesn’t quite reward you as much as it could. It’s a bit like a wizard who insists on casting spells that are mostly harmless.2

The Vanguard International Dividend Appreciation ETF (VIGI) is simply the above, but with a slightly shorter memory – seven years of dividend growth will suffice. As if a company’s commitment to rewarding shareholders is a matter of mere seniority.

Then there’s the Vanguard High Dividend Yield ETF (VYM). A ‘high yield’ fund that, predictably, starts with all the dividend-paying stocks in America, calculates their yield, and grabs the top half. It’s a bit like sorting through a pile of enchanted artifacts and picking the ones that shine the brightest, regardless of whether they’re cursed or not. And, crucially, it weights everything by market capitalization. Meaning the biggest companies get the biggest influence, regardless of how generous they are with their dividends. It’s a system designed to benefit those who are already benefiting.

The Vanguard International High Dividend Yield ETF (VYMI) is… well, you can probably guess. It’s the international version of the above. Groundbreaking, isn’t it?

The Vanguard Wellington Dividend Growth Active ETF (VDIG) at least attempts something different. It’s actively managed, which means someone is actually trying to make decisions, rather than simply following a pre-programmed algorithm. But it yields about 1% and has a disturbing fondness for tech stocks. Which, while perfectly respectable, don’t exactly scream ‘income.’ It’s like hiring a dragon to guard your gold, then finding out it prefers to hoard shiny pebbles.

Fidelity’s Funds: A Touch More Alchemy, Perhaps?

The Fidelity High Dividend ETF (FDVV) is their most well-known offering. It considers yield, dividend growth, and payout ratio. A multi-factor approach, they call it. Which is a fancy way of saying they’re looking at more than just one thing. It’s a small step towards sanity, but still heavily tilted towards yield. It’s a bit like a potion that tastes awful but might, just might, cure your ailment.

The Fidelity International High Dividend ETF (FIDI) does the same thing, but for stocks outside the United States. A geographical diversification, they claim. Which, in this context, mostly means spreading the risk around a bit more.

The Fidelity Dividend ETF for Rising Rates (FDRR) is the most interesting of the bunch. It considers yield, dividend growth, payout ratio, and – crucially – the stock’s correlation to 10-year Treasury yields. The idea is to find stocks that benefit when interest rates rise. Which is a perfectly reasonable strategy, in theory. But only 10% of the scoring formula is based on this correlation. And, predictably, the top holdings are all megacap tech stocks. It’s a bit like building a fortress out of marshmallows – it looks impressive, but it won’t withstand a siege.

A Skeptic’s Assessment: Where Does the Gold Lie?

I’ve always maintained a healthy skepticism towards these ‘high yield’ strategies, and these Vanguard and Fidelity funds do little to change my mind. Their approach of simply grabbing the highest yields is… simplistic. The weighting by market capitalization exacerbates the problem, giving undue influence to the largest companies. It’s a system that rewards size, not necessarily generosity.

Fidelity’s approach is marginally better, but still flawed. The consideration of dividend growth and payout ratio is a step in the right direction, but the weighting strategy still favors megacap tech stocks. A true high-yield strategy would emphasize financials and energy, not companies that are primarily focused on growth.

Vanguard’s dividend-growth ETFs are fairly vanilla, but at least they eliminate the highest yields. However, the weighting by market capitalization still gives undue influence to big tech names. And the Wellington Dividend Growth Active ETF, while unique, seems to struggle in execution.

The Verdict: A Modest Triumph for Fidelity, But No True Victory

There’s a lot of room for improvement on both sides, but there’s enough here for dividend investors to find something that suits their needs. Vanguard wins on the dividend-growth side, simply because Fidelity doesn’t offer a comparable fund. Vanguard’s products use a relatively balanced approach, which is commendable.

I clearly prefer Fidelity in the high-yield category, although everything on both sides seems structured to overweight megacap tech. Truer high-yield strategies would likely emphasize financials and energy a little, and I would prefer to see some of that here.

As far as breadth of offerings, Vanguard wins. Specifically, in the high-yield category, I think Fidelity wins. All of them, however, have their flaws. The search for a truly rewarding dividend strategy continues. Perhaps, like the Holy Grail, it’s a quest, not a destination.

1 The Guild of Alchemists and Venture Capitalists, as they are known in certain circles. Their power is immense, and their motives… opaque.

2 A wizard who insists on casting spells that are mostly harmless, but occasionally cause unexpected side effects, such as turning your socks into badgers.

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2026-02-11 15:02