Vanguard Dividend Appreciation ETF (NYSEArca: VIG) has the potential to be a core holding within a portfolio because it holds a diversified collection of high-quality dividend stocks. The index holds U.S. stocks that have increased their dividend payout for at least the past decade.
The yield is not necessarily what is attractive about the fund. The yield is almost equal to the S&P 500, which makes the motivation to buy this fund more about the lower risk and total return characteristics, reports Chris Baines for the Motley Fool.
“FTSE removes all companies that did not pay out a dividend in the past 12 months from the potential constituent universe, and than ranks the remaining stocks by yield. This index comprises the highest-yielding of those remaining stocks that sum as much as 50%of the total market capitalization of potential constituents. In practice, this ends up producing an index of the highest third of the U.S. market. The FTSE High Yield Dividend Index is market-cap weighted, so it incorporates market price information about the current state of businesses and sustainability of dividends. This also makes it easier for Vanguard to replicate the index without incurring taxable capital gains, ” Samuel Lee wrote for a Morningstar fund analysis.
The index re-balancing occurs once per year with turnover about 10% per year. The lower turnover rate keeps the expense ratio low, at 0.18%. The dividend yield is 2.3%. [ETF Chart of the Day: Dividend Funds]
VIG has a high-quality index that has a history of rewarding its investors and does not expose them to sector concentration or unnecessary risks. Baines reports that over the past decade, VIG has beaten the S&P 500 by one percentage point per year. [Can Dividend ETFs Outperform Again After Stellar 2011?]
The high quality companies that the fund holds include Coca Cola (NYSE: KO), Wal-Mart (NYSE: WMT) , Berkshire Hathaway (NYSE: BRK.B) and IBM (NYSE: IBM), to name a few.This is why the ETF can also double as a core holding within a portfolio. Many of the top quality companies found in the index are U.S. large caps that maintain growth. [U.S .ETFs See More Inflows]
It is important to keep in mind that companies do change their dividend policies, however, for the type of companies that are represented in VIG, this is rare. VIG currently has about $9 billion in assets under management.
Vanguard Dividend Appreciation ETF
Tisha Guerrero contributed to this article.