With a 2.1% dividend yield, the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) may not look like the type of ETF that dividend investors will be lining up to buy, but it’s an attractive choice for both dividend and generalist investors alike. Dividend investing isn’t just about seeking stocks with high yields. Instead, it’s often better to focus on stocks that consistently grow their dividends over time. Dividend growth investing is a time-honored strategy that has generated market-beating results over the long term.
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I’m bullish on VIG based on its comprehensive portfolio of great dividend growth stocks, strong diversification, and investor-friendly expense ratio.
What is the VIG ETF’s Strategy?
VIG is an ETF from Vanguard, and it is the largest dividend growth ETF in the market, with $65.6 billion in assets under management (AUM). It is an index fund that tracks the performance of the S&P U.S. Dividend Growers Index. According to Vanguard, the fund emphasizes large-cap stocks “with a record of growing their dividends year over year.”
Why Invest in Dividend Growth Stocks?
It goes without saying that stocks with growing dividend payouts offer the benefit of increased income over time. But the appeal of dividend growth stocks goes beyond that. Companies that consistently increase their dividend payouts are typically fundamentally strong companies that demonstrate strong earnings growth and profitability.
Investing in dividend growth stocks gives investors two ways to win: they can enjoy rising dividend income over time and hold shares in prospering companies likely to experience stock price growth.
Historically, dividend growth stocks have outperformed the broader market over the long term. According to Hartford Funds and Ned Davis Research, from 1973 to 2022, dividend growth stocks and dividend initiators returned 10.2% on an annualized basis versus a 7.7% annualized return for an equal-weighted S&P 500 (SPX) index.
These are the types of companies VIG invests in.
VIG’s Holdings
What does a portfolio of these dividend growth stocks look like? VIG offers excellent diversification, as the fund owns 315 stocks, and its top 10 holdings make up 31.5% of assets.
Below, you’ll find an overview of VIG’s top 10 holdings, created with TipRanks’ holdings tool.
As you can see, VIG owns a strong portfolio of large-cap, blue-chip U.S. stocks that have provided investors with both capital appreciation and dividend growth over time.
Take top holding Microsoft (NASDAQ:MSFT), for example. The tech giant may only yield 0.9%, but it has increased its dividend payout for 18 years in a row, and its shareholders have enjoyed total returns north of 1,000% over the past decade (total returns combine the appreciation of the stock’s price with dividend payouts). I think almost any investor would sign up for that type of performance.
Similarly, Broadcom (NASDAQ:AVGO) yields 2.2%, but it has increased its dividend payout for 12 years in a row, and its total return of 2,315% over the past 10 years trumps even that of Microsoft. This is why it can pay to focus on stocks that are growing their dividend payouts as opposed to simply looking for stocks with high yields.
VIG’s top holdings also feature a formidable collection of Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks and ETFs a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.
Impressively, all 10 of VIG’s top 10 holdings feature Outperform-equivalent Smart Scores of 8 or above, and three of them — ExxonMobil (NYSE:XOM), Visa (NYSE:V), and Broadcom — feature ‘Perfect 10’ Smart Scores. ExxonMobil has increased its dividend payout for 40 years in a row and just did so again following its latest earnings report.
Overall, the VIG ETF has an 8 out of 10 Smart Score rating on TipRanks.
VIG’s Dividend
How about the dividend payout for VIG itself? VIG currently yields 2.1%. It has paid a dividend for 16 straight years and has raised its own dividend payout for nine years in a row.
A Low-Cost Choice
Another nice thing about VIG is that it is a low-cost option for investors with an incredibly reasonable expense ratio of just 0.06%.
What does this mean? It means that an investor allocating $10,000 into VIG today would pay just $6 in fees over the course of a year. Over the course of 10 years, this same investor would pay just a paltry $77 in fees, assuming that VIG returns 5% per year and that the expense ratio remains at 0.06%.
Avoiding paying high fees with low-cost ETFs like this one helps investors build and preserve their wealth over time.
Solid Long-Term Performance
While it has returned only 3.1% in the past year, VIG has delivered solid returns for its investors over time.
Over the past three years (as of the end of the most recent month), VIG has generated an annualized total return of 8.5%, and over the past five years, it has produced an annualized return of 9.1%. Zooming out to 10 years, VIG has managed to produce impressive double-digit total returns on an annualized basis, with an annualized return of 10.5% over the past decade. Since its inception in 2006, VIG has returned 8.9% on an annualized basis.
These returns have slightly underperformed those of the Vanguard S&P 500 ETF (NYSEARCA:VOO), which simply invests in the S&P 500. VOO’s three-, five-, and 10-year returns of 10.1%, 9.9%, and 11.9% slightly outpace those of VIG, but both ETFs have generated double-digit returns over the past decade, so both have been very good investments for long-term investors.
Is VIG Stock a Buy, According to Analysts?
Turning to Wall Street, VIG earns a Moderate Buy consensus rating based on 212 Buys, 94 Holds, and 10 Sell ratings assigned in the past three months. The average VIG stock price target of $179.39 implies 19.5% upside potential.
Investor Takeaway
In conclusion, VIG looks like a great choice for dividend investors, and investors in general, based on its winning strategy of investing in dividend growth stocks, its strong portfolio, and its investor-friendly expense ratio.
