Why 2026 Could Favor Dividend Stocks and Bonds Over Small-Caps
Investors looking ahead to 2026 may find both bonds and dividend-paying stocks appealing. Expected Federal Reserve rate cuts, steady inflation, and slower economic growth could shape stock market opportunities. Two key exchange-traded funds (ETFs) stand out for their low costs and broad exposure: the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard Total Bond Market ETF (BND).
The Vanguard Dividend Appreciation ETF (VIG) focuses on companies with a strong history of raising dividends. To qualify, firms must have increased payouts for at least ten consecutive years. The fund uses market-cap weighting, meaning larger companies like Broadcom, Microsoft, and Apple—its top three holdings—carry more influence. Despite their yields falling below 1%, these tech giants have consistently grown dividends, aligning with VIG’s strategy. The ETF’s expense ratio of 0.05% keeps costs low for investors seeking reliable dividend growth.
Bonds could gain traction in 2026 as yields normalize and the stock market today potentially lowers interest rates. A stable inflation backdrop may further support fixed-income investments. The Vanguard Total Bond Market ETF (BND) offers wide coverage of the U.S. bond market, including Treasuries, corporate bonds, inflation-protected securities, and mortgage-backed bonds. With an expense ratio of just 0.03%, it provides a cost-efficient way to access diversified bond exposure. Small-cap stocks, represented by funds like the Vanguard Russell 2000 ETF (VTWO), face a mixed outlook. Nearly 40% of its holdings are unprofitable, and their performance may hinge on interest rate movements. If rates remain elevated, small-caps could continue to lag behind larger, more established companies.
For 2026, dividend-focused ETFs like VIG could benefit from slower growth and stock market volatility, while bond funds such as BND may attract investors if rate cuts materialize. Both options offer low-cost access to their respective markets. The performance of small-caps, however, will likely depend on how interest rates evolve in the coming year.
