Dividend Growth or High Yield: The Income Investor's Bet

On May 13, the market got two important, and potentially conflicting, data points regarding inflation. Before the market opened, the April Producer Price Index (PPI) came in hot. This wasn’t totally unexpected due to high energy prices, but the market initially sold off on the news.

However, later in the day, Kevin Warsh was confirmed as the new Federal Reserve chairman. Nobody knows how much influence Warsh will have over interest rates. But Warsh is committed to changing the way the institution operates, which includes looking at data beyond the current “if A, do B” approach.

Together, those data points created a split-screen moment. That is, hot inflation data is pulling rates higher, while a new Fed chair introduced fresh uncertainty about the rate path.

Growth investors can mostly look through interest rates, but for income investors (i.e., retirees), rates matter a lot. If the Federal Reserve cuts interest rates, investors would want to lock in higher rates now. On the other hand, if rates stay the same, or even move higher, investors will want to bet on dividend growers that can keep their total return ahead of inflation.

VYM – Profit From the “Stay the Course” Choice

The Fed’s likely course of action for the next few meetings will be to do nothing. However, by October, the CME Group puts the odds for a rate cut at nearly 20%. By December, that goes to nearly 30%.

Even if cuts don't materialize until late in the year, locking in today's yields before any move downward is a smart defensive choice. That makes the case for the Vanguard High-Dividend Yield ETF (NYSEARCA: VYM). The fund has over 400 holdings, which makes it close to owning the entire high-dividend portion of the U.S. market, with an expense ratio of just 0.04%.

The fund has a current yield of approximately 2.2% and has been growing the dividend at an annual average rate of 3.79% in the last five years. The fund has delivered a return of over 45% in the last five years.

VYM is the most "set it and forget it" of the three—for investors who value simplicity and broad diversification; it is the most defensible long-term choice on cost and diversification grounds. However, its slowing dividend growth rate is a real concern in an inflationary environment, where income that doesn't grow steadily loses real purchasing power.

DGRO – Choose the Contrarian Approach That May Be Right

The CME Group puts the odds of a rate cut in the June 2026 meeting at 1.5%. Those odds don’t get any better for the remainder of the year. For example, the odds of a 25-basis point (0.25%) cut in December 2026 are just 1%.

But this is 2026, and that means it’s hard not to at least consider what Polymarket projects. As of this writing, Polymarket odds concur with the CME Group for June. But in December 2026, Polymarket puts the odds of a rate cut at 31%.

It may seem hard to believe, but it wouldn’t be the first time the consensus opinion has been surprised by the accuracy of the prediction markets. And if 2026 has shown investors anything, it’s that what we think we know about how inflation is going to play out by December is incomplete at best.

That makes the argument for dividend growers, which is the wheelhouse for the iShares Core Dividend Growth ETF (NYSEARCA: DGRO). The fund targets companies with strong balance sheets and predictable cash flows — characteristics that can provide stability during market downturns.

DGRO has delivered a 3-year annual dividend growth is 7.49% and 8.59% over the last 10 years. Over the last five years, the fund’s total return was about 45%. And it’s done all of that with an attractive expense ratio of 0.08%.

The fund is up a little more than 5% in 2026, but the share price collapsed sharply at an all-time high in February when the Iran war changed the inflation outlook. However, as of the market close on May 13, DGRO is almost back to its all-time high and, if a rate cut does happen, it’s not hard to see a path for further stock price gains of 10% or more.

SCHD – Benefit From a Goldilocks Solution

The clearest path forward for the Federal Reserve may be to do nothing. That view is the betting favorite by both the CME Group and Polymarket. In that case, investors may want to choose the Schwab US Dividend Equity ETF (NYSEARCA: SCHD).

The fund gets its Goldilocks label because it doesn’t fit neatly on either side of the rate debate. It applies a quality screen on top of dividends, overweighting financials, consumer staples, healthcare, and industrials, while holding very little tech.

The fund also currently offers the highest yield at approximately 3.3%, manages about $91.28 billion in assets, and has delivered the strongest one-year return, rising more than 20%. Its expense ratio is 0.06%.

Capital is currently rotating away from speculative AI stocks toward defensive dividend stocks, positioning SCHD to lead dividend ETFs after trailing for three years. It resolves the fork by offering both the highest current yield and the strongest dividend growth track record—the closest thing to a dominant answer in this trio.

Ultimately, the right choice among these three comes down to one question: when do you expect the Fed to move? If you believe cuts are coming sooner, DGRO's growth profile becomes more compelling. If you expect rates to hold, SCHD's blend of yield and quality is hard to beat.

And if simplicity and low cost matter most, VYM remains a defensible anchor. For many investors, the most honest answer may not be picking one, but holding two in combination to cover both sides of the rate debate.

Companies Mentioned in This Article: