The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) is the largest dividend exchange traded fund trading in the U.S. At the end of April, the fund had $27.1 billion in assets under management.

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.

“Focusing on dividend growth reduces the fund’s exposure to firms that have weak fundamentals and may not be able to sustain their dividend payments, which is a risk that often accompanies a narrow focus on yield,” said Morningstar in a recent note.

VIG holds 182 stocks with a median market capitalization of $65.9 billion. The ETF tracks the Nasdaq US Dividend Achievers Select Index. The index’s 10-year dividend increase streak requirement “restricts the fund to holding highly profitable firms with shareholder-friendly management teams that have consistently raised dividend payments,” according to Morningstar.

Consistency And Quality

In many cases, dividend growers can be considered quality stocks with more stability and less volatility than high dividend names.

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.

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