Is This Dividend ETF a Suitable Option for Income-Focused Portfolios?

With the biggest returns over the past few years belonging to tech and artificial intelligence (AI) stocks, it'd be easy to forget that dividend stocks still deserve a spot in your portfolio. As investors look forward to 2026, the case for dividend payers is actually improving, and the uptrend may have already begun.

Over the past three months, the performance of the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) has beaten both the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq-100 indices. Granted, that's a relatively short time frame, but it's evidence that the market may finally be broadening out away from the megacaps that currently dominate.

This ETF's strategy is quite simple. It starts with a broad universe of U.S. stocks, forecasts their dividend over the next 12 months, and selects those with above-average yields. Qualifying components are weighted by market cap, so you end up with a portfolio heavy with large-cap stocks.

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The current 2.5% yield (as of Dec. 31, 2025) isn't that eye-popping, but it is more than double the 1.1% yield of the S&P 500. Plus, its strategy is broad enough that it isn't leaning too heavily into ultra-high yielders or deep value stocks and becoming overexposed to riskier equities.

Why the Vanguard High Dividend Yield ETF?

One of the Vanguard High Dividend Yield ETF's primary advantages is that while it maintains a roughly 14% allocation to tech stocks at the moment, it's diversified enough that it can really take advantage of a rotation away from the more expensive areas of the market. Current top sector holdings include:

1. Financials (21%)
2. Tech (14.3%)
3. Industrials (12.9%)
4. Healthcare (12.8%)

Those are sectors that all have real upside catalysts right now.

• Most investors are probably familiar with the current AI boom, so there's no reason to outline the case for tech.
• Financials are currently benefiting from higher for longer interest rates (which usually lead to improved profit margins). There's been a meaningful pickup in merger and acquisition activity, which can be a huge revenue generator for the big banks.
• Industrials can provide cyclical upside if the economic expansion continues. A slowdown in growth rates could trigger a rotation out of growth stocks. But if nominal growth remains positive, we could see cyclically sensitive areas of the market pick up the slack.
• Healthcare is experiencing an increase in innovation and has the tailwind of deregulatory efforts at its back. If legal hindrances are stripped back, it could lead to more rapid drug approvals and financial savings from reduced compliance costs.

That creates a bullish argument for this fund and high-yield equities in general. Steady GDP growth, low unemployment, and stable inflation mean the backdrop for further gains in stock prices is favorable.

It's reasonable to think that the recent growth rally, which has mostly been driven by just a handful of expensive megacaps, could slow (or even reverse). If that happens, value and dividend stocks could be well-positioned to take the baton.

This makes the Vanguard High Dividend Yield ETF a compelling option for income-focused portfolios.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.