The Vanguard Dividend Appreciation Index Fund ETF Shares (NYSEArca: VIG) is one of the largest U.S. dividend exchange traded funds (ETFs) due in part to its modest fee of 0.08% per year, or $8 on a $10,000 investment. At the end of the first quarter, VIG had $32.8 billion in assets under management.
VIG seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. The fund employs an indexing investment approach designed to track the performance of the Nasdaq US Dividend Achievers Select Index, which consists of common stocks of companies that have a record of increasing dividends over time.
The requirement for entry into VIG’s underlying index is that companies must meet a minimum dividend increase streak of 10 years.
“This strategy focuses on dividend growth rather than dividend yield,” said Morningstar in a recent note. “This approach reduces the fund’s exposure to firms with weak fundamentals that may not be able to sustain their dividend payments, which is a risk that often accompanies a narrow focus on yield. The fund builds its portfolio by selecting only among stocks that have increased their dividend payment for at least 10 consecutive years. This stringent hurdle restricts the fund to holding highly profitable firms with shareholder-friendly management teams that have consistently raised dividend payments.”
Visiting VIG ETF
VIG holds 185 stocks with a median market value of $87.7 billion. The fund allocates a combined 47.60% of its weight to the industrial and consumer staples sectors. Its weight to technology stock is somewhat low at 8.20% due in part to the increase streak requirement of 10 years. While many large-cap tech companies are growing dividends, they have not yet met 10 consecutive years of higher payouts.
Importantly, VIG also “applies additional proprietary screens to filter out firms that may not be able to sustain their dividend growth,” according to Morningstar.
VIG currently yields 1.96%, which is not high, but the fund has proven durable over the long haul.
“As of this writing, the strategy’s dividend yield of 2 percentage points annually matches the dividend yield of the Russell 1000 Index. But the strategy’s tilt toward more-stable stocks has helped it shine during market downturns. Its drawdown during the bear market from October 2007 through March 2009 measured 9 percentage points less than the Russell 1000 Index’s drawdown,” according to Morningstar.
The research firm has a Gold rating on Morningstar.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.