The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) is the largest dividend exchange traded fund trading in the U.S. In addition to its low fee, one of the lowest among U.S. dividend ETFs, investors love VIG for its dividend consistency.
VIG targets U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years. Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
“VIG targets stocks that have raised dividend payments for at least 10 consecutive years and applies a profitability screen to avoid stocks that may be at risk of cutting their dividend payment,” said Morningstar in a recent note. “To further mitigate risk, VIG weights its holdings by their market capitalization and caps single stock weightings to 4% of the portfolio.”
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
Companies with a record of raising dividends are more attractive than usual since they issue their dividends cautiously. These dividend payers typically include higher quality companies that are more cautious when raising dividends since they would do so without stretching their balance sheets.
Income-minded investors have also typically gravitated toward these high quality companies as firms that regularly raise dividends also tend to be confident about their ability to continue paying the dividends as the dividend increases are also calculated in line with future growth.
“Vanguard Dividend Appreciation ETF (VIG) and Vanguard High Dividend Yield ETF (VYM) are among the cheapest dividend-oriented funds available. VIG earns a Morningstar Analyst Rating of Gold while VYM earns a Morningstar Analyst Rating of Silver. The primary difference between the funds is that VIG targets dividend growth while VYM targets high-dividend yield,” according to Morningstar.
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