Are you looking to simplify your income investments in a way that doesn't require regular monitoring? An exchange-traded fund (or ETF) is the obvious choice. These are just baskets of stocks managed and maintained by professional fund managers on your behalf. In this case, the basket would consist of dividend-paying tickers.
But which ETF? After all, just as there are many dividend stocks, there are hundreds of dividend-focused exchange-traded funds.
The Vanguard Dividend Appreciation ETF (VIG 0.31%) is arguably up to the task at least as much as any other option. Here's why it's a standout.
The Vanguard Dividend Appreciation ETF is similar, but different
Just as the name suggests, the Vanguard Dividend Appreciation ETF is first and foremost focused on dividend growth. As such it only holds stocks with a strong track record of dividend increases. It's built to mirror the S&P U.S. Dividend Growers Index, which consists of U.S. companies that have raised their annual dividend payouts every year for at least the past 10 years. Although it excludes the highest-yielding 25% of dividend payers (since ultra-high yields often end up being unsustainable), it does include tickers beyond the large-cap realm that many investors limit their options to.
That said, it is mostly large-cap stocks. Its top holdings at this time are Apple, Broadcom, JPMorgan Chase, and Microsoft.
As for its income-generating potential, as of the latest look the Vanguard Dividend Appreciation ETF's average trailing dividend yield is a respectable 1.7%.
Sure, you can find better from similar exchange-traded funds. The iShares Core Dividend Growth ETF based on the Morningstar U.S. Dividend Growth Index, for instance, sports a yield of just over 2.1%. The ProShares S&P 500 Dividend Aristocrats® ETF's current dividend yield currently stands at 2.2%; it of course is meant to mirror the performance of the market's Dividend Aristocrats®, which are stocks that have raised their dividend payments for a minimum of 25 years. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.)
There's a very specific reason you still might want to opt for the Vanguard Dividend Appreciation though. That is, on a net-total-return basis it outperforms both of the other aforementioned dividend growth ETFs.
Surprisingly strong performance
The chart below tells the tale, comparing the total returns of all three funds in question (assuming all dividends are reinvested in more shares of the ETF paying them). While it's only barely outperformed the iShares Core Dividend Growth ETF over the course of the past decade, it's convincingly beaten the Dividend Aristocrats® fund during this time.
NOBL Total Return Level data by YCharts
How is this the seemingly unlikely case? The answer is a two-parter.
First, as your intuition might tell you, the Vanguard Dividend Appreciation ETF's dividend growth tends to take shape at a faster pace than either of the other two choices. Its current quarterly payout is nearly twice what it was just 10 years ago, for perspective. At least some of the credit for this rapid dividend growth goes to the fact that inclusion in the underlying S&P U.S. Dividend Growers Index isn't unnecessarily strict, yet -- namely by excluding the market's highest-yielding stocks -- is savvier when it comes to ensuring quality.
As for the second part of the explanation, as it turns out, quality dividend-paying stocks often end up achieving more capital appreciation than non-dividend payers do anyway.
Mutual fund company Hartford crunched the numbers, finding that since 1973 companies willing and able to initiate and/or raise their dividend payouts experienced net average annual returns of just over 10%, while shares of S&P 500's companies that didn't pay or raise dividends during that period only averaged annual returns on the order of about half that much.
It seems counterintuitive on the surface. Stocks like Nvidia, Amazon, and Alphabet don't pay any dividends to speak of, yet these tickers have led the market for the past several years.
Just understand that names like Alphabet and Nvidia have been the exception to the norm rather than the norm. As Hartford's commentary on its own research explains, "corporations that consistently grow their dividends have [also] historically exhibited strong fundamentals, solid business plans, and a deep commitment to their shareholders."
The better all-around option
None of this is to suggest the iShares Core Dividend Growth ETF and the ProShares S&P 500 Dividend Aristocrats® ETF are bad investments, particularly if you need to maximize your income right away. With either one of those tickers you'll immediately start collecting at least a little more dividend income than you would with a comparably sized investment in the Vanguard Dividend Appreciation ETF.
If you've got at least a little income wiggle room to work with though, the Vanguard fund is a solid alternative with real potential for meaningful capital appreciation as well as dividend growth that's more likely to outpace inflation.
And if you plan on holding onto this investment for the long haul, that last little detail becomes increasingly important as time marches on... whether you intend to live on your dividend income, reinvest it, or a little of both.
