Exchange traded funds that track solid, stable companies with a history of dependable dividend growth can provide better risk-adjusted returns.
For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), which tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years, has outperformed the market with slightly less risk since 2008, writes Michael Bodman, the principal of Portfolio Economics, for Seeking Alpha. [Dividend, Buyback ETFs for Value Investors]
Since the start of 2008, VIG has generated a 49.5% return, compared to the SPDR S&P 500 ETF (NYSEArca: SPY) 45.1% return. Looking at risk, the standard deviation of SPY is 23.41, whereas VIG shows a 22.77 standard deviation.
Dividends have been a long historical source of overall returns for investors. According to Columbia Management, dividends have accounted for 42% of investor’s total return. VIG currently offers a 1.91% 12-month yield.
Ever since 1926, stocks that pay a dividend have historically outperformed non-dividend paying stocks by 1.7% on an annualized basis, according to Morningstar analyst Michael Rawson.
VIG is no exception. After it first began trading in April 2006, VIG has returned an annualized 7.9% through mid-November, beating the 7.6% return from the S&P 500 index. Additionally, due to its focus on high-quality companies with returns on capital that are less sensitive to market cycles, VIG’s holdings were better able to better withstand the swings following the financial crisis.