The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) is the largest dividend exchange traded fund trading in the U.S. and there multiple reasons why this fund has been so widely embraced by income-seeking investors.
Dividends provide an additional source of income and returns in an equity portfolio, but investors should still know the type of exposure dividend exchange traded fund investments provide.
While high yield dividend ETFs generate attractive yields, the dividends may not be sustainable or the stocks could be more susceptible to market volatility. On the other hand, investors can take a look at stable “Dividend Achievers” that have a regularly increased dividends over the past.
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 tracks the NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index).
“So, already, you have a backward-looking screen, if you will, that looks for companies that have only paid their dividends. And so, the problem with that is, is that you avoid some of the larger dividend-payers like Apple, because they just started paying dividends three or four years ago, but that is a good way to avoid some of the stocks that may cut their dividends. And then this fund also applies a proprietary screening that NASDAQ implements to avoid stocks that are in lower quality or lower profitability than their peers,” according to Morningstar.
VIG, which had $29.6 billion in assets under management at the end of April, holds 188 stocks. Industrials are by far the ETF’s largest sector weight at 31.5% while both consumer sectors combine for just over 30% of VIG’s weight. Interest rate-sensitive telcom and utilities stocks combine for barely more than 2% of VIG’s roster.
In May, Pennsylvania-based Vanguard said VIG’s annual expense ratio was slightly lowered by one basis point to 0.08%, the equivalent of $8 per year on a $10,000 investment. That makes VIG less expensive than 92% of rival funds, according to Vanguard data.
“Part of the problem with looking at higher-quality dividend funds is that the yield in this fund is closer to the category average. So, this actually lands in the large-blend category. And so, its yield is about 2.2%, 2.3%, which is in line with the Russell 1000, but it is able to avoid those companies that are likely to cut their dividend in the future,” adds Morningstar.
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