This “Boring” Vanguard Dividend ETF Is Quietly Beating the S&P 500 in 2026
Value leadership has returned: VYM has outperformed VOO year to date in 2026 as value stocks have benefited from a pullback in several large AI-driven technology names.
Quality dividend methodology: VYM tracks the FTSE High Dividend Yield Index, holding more than 600 large-cap companies selected by forward dividend yield while excluding REITs.
Tax efficiency remains a strength: Low turnover, the ETF structure, and 100% qualified dividend treatment in 2025 have helped VYM preserve more of its returns after taxes than many investors might expect.
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For much of the past decade, dividend ETFs have largely trailed broad market-cap-weighted index funds. I think that comes down to three main reasons.
First, specialized dividend strategies generally charge higher fees than plain-vanilla index funds. Even seemingly small differences in expense ratios compound over long holding periods.
Second is taxes. Outside of tax-advantaged accounts like a Roth IRA, every dividend payment is generally a taxable event. Even if the underlying investment performs well, taxes can quietly chip away at long-term returns.
The third, and probably most important, reason is factor exposure. Many dividend ETFs naturally tilt toward value stocks, while the last decade belonged overwhelmingly to growth. As mega-cap technology companies drove the S&P 500 to repeated highs, value-oriented dividend strategies simply struggled to keep pace.
That dynamic has started to shift in 2026. Value stocks have staged a resurgence as several Magnificent Seven companies have stumbled amid concerns that artificial intelligence capital spending may have become overly aggressive. It's still far too early to declare a lasting change in leadership, but the performance has been noticeable.
As of Aug. 4, 2026, the Vanguard High Dividend Yield ETF (VYM) has generated a 16.58% cumulative total return , outperforming the Vanguard S&P 500 ETF (VOO) at 13.75% year to date. One year doesn't establish a long-term trend, but VYM remains one of the dividend ETFs I continue to keep on my watch list.
VYM tracks the FTSE High Dividend Yield Index. The index excludes real estate investment trusts (REITs), removes companies that have not paid a regular dividend during the previous 12 months or are not expected to pay one over the coming year, then ranks the remaining stocks by their forward dividend yield. Those companies are subsequently weighted by market capitalization.
The result is a broadly diversified portfolio of 605 companies that carries a noticeable large-cap value tilt without sacrificing quality. Sector allocations also differ meaningfully from the S&P 500. Financials represent the largest allocation at 20.7% , followed by technology at 14.6% , industrials at 14.4% , and healthcare at 12.4% .
That value bias shows up in the portfolio's valuation metrics as well. VYM currently trades at an average price-to-earnings ratio of 21.6 , below that of the S&P 500, while still producing an impressive 19.4% return on equity .
One feature that often gets overlooked is VYM's tax efficiency. The fund currently offers a respectable 2.22% 30-day SEC yield without relying on covered calls or other derivative strategies that cap upside. More importantly, Vanguard reported that 100% of VYM's 2025 dividend and net short-term capital gain distributions qualified as qualified dividend income , making them eligible for the lower long-term capital gains tax rates for most investors.
Two factors help explain that outcome. First, the ETF structure itself is highly tax-efficient because the in-kind creation and redemption process minimizes taxable capital gains distributions. Second, VYM explicitly excludes REITs, whose distributions are generally taxed as ordinary income rather than qualified dividends.
That combination has helped the fund maintain strong after-tax performance. According to Vanguard, over the 10 years ending June 30, VYM produced an 11.60% annualized return before taxes . After accounting for taxes on distributions, that figure declined only modestly to 10.79% annualized , illustrating just how tax-efficient the strategy has been despite its dividend focus.
Whether VYM continues outperforming VOO will ultimately depend on whether value stocks remain in favor. Leadership between growth and value has historically rotated over market cycles. That's one reason I view VYM less as a tactical trade and more as a long-term core holding.
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