In the ongoing hunt for yields, exchange traded fund investors have delved deep into the markets, fishing out the highest yielding, and often riskiest, funds. Investors, though, should not overlook the more stable ETFs that provide exposure to quality dividend-producing firms.
For instance, Samuel Lee, ETF analyst at Morningstar, highlighted the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) as a quality dividend ETF pick. [Dividend Stocks and ETFs: Is Bigger Better?]
“VIG focuses on quality dividends, demanding that companies increase them for 10 consecutive years just to make the cut. It then imposes further tests for liquidity and financial strength,” Lee wrote. “The exact formula is secret but seems to weed out companies with high leverage and poor cash flow. The result is quality rather than high yield, so income-hungry investors might be surprised by a dividend yield that just matches the market.”
The ETF follows the Dividend Achievers Select Index, which holds stocks that have increased dividends in each of the last 10 years. The portfolio is top heavy, with the top ten holdings accounting for about 40%. Additionally, VIG favors the tech and service and manufacturing sectors.
VIG has a 12-month yield of 2.09% and a 0.13% expense ratio.
In comparison, the S&P 500 index has a dividend yield of 1.93%. [Special Report: Surveying the Dividend ETF Landscape]
“We think the fund’s emphasis on safer yields justifies its average yield,” Lee added. “VIG is a great choice for a core allocation.”
To the average investor, dividends matter. Lee points out that from 1900 to 2010, the U.S. stock market generated a 6.17% annualized real growth, with 4.24% of the returns coming from dividends alone.
As the S&P 500 sits at 1,400, with yields at about 2%, and annualized real per-share dividend growth of around one to two percent, Lee estimates that the U.S. stock investor can expect a long-term 3.5% to 4.5% annualized real return.
Vanguard Dividend Appreciation ETF
For more information on dividend generating funds, visit our dividend ETFs category.
Max Chen contributed to this article.