Home to $20.4 billion in assets under management as of the end of April, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) is the largest dividend exchange traded fund trading in the U.S.
VIG has established that massive following for several reasons, including a paltry 0.1% annual fee, which makes it less expensive than 90% of rival funds, and a mandate that requires constituent companies to have dividend increase streaks of at least 10 years.
However, dividend ETFs, including VIG, have fallen on hard times this year. Down 1.1% for the year, VIG is in danger of falling below its 200-day moving average for the first time since October. Not to mention investors have yanked nearly $718 million from the fund, the worst outflows total among the four largest U.S. dividend ETFs. [Retirees May Need More Stock ETFs to Meet Income Needs]
There are over 500 ETFs that offer better yields than 10-year U.S. Treasurys, but with the recent yield spike that has taken 10-year yields over 2.4%, VIG is not one of those 500 ETFs. The Vanguard fund has trailing 12-month yield of 2.12%, or 30 basis points below where 10-year yields closed on Tuesday. Still, VIG holds allure for retirees and those planning for retirement.
“The general theory investors should be remembering when investing in funds like VIG is that dividend yield is the dominant consideration. The dividends should be expected to rise over time and appreciation in the ETF over the very long haul (decades) should be reflective of the growth in dividends. Rather than looking at capital appreciation, investors should be looking at the growth in the dividends they receive over time. There are plenty of things to like about this ETF. In my opinion, VIG is better than Social Security,” according to a Seeking Alpha post.
Speaking of dividend growth, VIG has a 13.7% weight to the technology sector, which is high among dividend ETFs. That gives the ETF some leverage to a sector that has been a major source of dividend growth in recent years. Three tech stocks – Microsoft (NasdaqGS: MSFT), IBM (NYSE: IBM) and Qualcomm (NasdaqGS: QCOM) – are found among VIG’s top 10 holdings. However, due to VIG’s dividend increase streak requirement, Apple (NasdaqGS: AAPL) has another eight years to go before it join the fund. [Dividend ETFs Still Lack Tech Exposure]
In a sign that plenty of VIG’s 180 holdings have dividend increase well in excess of 10 years, some of the fund’s marquee holdings, including Dow components Coca-Cola (NYSE: KO), Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG), are dividend aristocrats. Dividend aristocrats are those S&P 500 members that have increased dividends for at least 25 consecutive years.
VIG also offers wide moat protection. Three of its current members, IBM, Emerson Electric (NYSE: EMR) and Polaris (NYSE: PII), are also holdings in the Market Vectors Wide Moat ETF (NYSEArca: MOAT) and several VIG holdings have previously resided in MOAT.
Vanguard Dividend Appreciation ETF