Vanguard has made it easy for anyone to invest in the stock market. The company offers a growing list of exchange-traded funds (ETFs) that allow you to invest broadly in the stock market or focus on specific themes or types of stocks.
One of its many funds is the Vanguard Dividend Appreciation ETF (VIG -1.91%). It's one of the smartest funds to buy because it tracks the performance of companies that grow their dividends. Historically, dividend growth stocks have delivered the highest total returns with the lowest risk. That makes this a great fund to buy and hold for 20 years to grow your wealth.
Tracking the power of dividend growth
The Vanguard Dividend Appreciation ETF aims to track the performance of the S&P U.S. Dividend Growers Index. The managers of that index designed it to measure the performance of U.S. companies that have consistently increased their dividends for at least the past 10 years. Of note, it excludes the top 25% highest-yielding dividend stocks because these companies typically have higher dividend payout ratios and lower growth profiles. Those characteristics put them at a higher risk of stopping growth or reducing their dividends in the future.
The ETF's focus on companies that grow their dividends and are at lower risk for a future reduction is worth noting, given the data on dividend stocks by their policies:
|
Dividend Policy |
Average Annual Total Returns |
|---|---|
|
Dividend growers and initiators |
10.2% |
|
Dividend payers |
9.2% |
|
No change in dividend policy |
6.8% |
|
Dividend cutters and eliminators |
(0.9%) |
|
Dividend non-payers |
4.3% |
|
Equal-weighted S&P 500 index |
7.7% |
Data sources: Ned Davis Research and Hartford Funds.
As that table shows, dividend growers have produced the best returns among dividend stocks by policy while also significantly outperforming non-dividend-payers.
The ETF has delivered similarly strong returns throughout its history. Since its inception in 2006, the ETF has produced a 9.6% annualized return. Meanwhile, its return over the past 10 years is 11.3%. To put that into perspective, $2,000 invested into the fund at its inception nearly 20 years ago would have grown into about $12,500 today at a 9.6% average annual return.
Great dividend growers in one single fund
The Vanguard Dividend Appreciation ETF currently holds 337 stocks. It has a higher weighting toward the biggest dividend growth stocks by market cap. Currently, the top 10 holdings comprise nearly 32% of its assets.
However, these are the cream of the crop when it comes to dividend growth stocks. For example, the fund's top holding is tech titan Apple (AAPL -1.81%), at 4.9% of the fund. The company has increased its payout for 14 straight years while growing it at a nearly 8% annual rate over the past decade. While Apple currently offers a low dividend yield of 0.5%, that payout is extremely safe. Apple produced nearly $30 billion in cash from operating activities last quarter, easily covering its $3.8 billion dividend outlay. Meanwhile, with its earnings up 10% last quarter and growing, Apple should have no trouble continuing to increase its dividend in the future.
NASDAQ: AAPL
Key Data Points
Apple is just one of the many high-quality dividend growth stocks among the fund's top 10 holdings. Other notable names are Visa, with 16 years of dividend increases; ExxonMobil, with 42 years of dividend growth; and Walmart, with 52 years of increasing its dividend.
One final thing to point out is that because the fund focuses on dividend growth and excludes higher-yielding dividend stocks, it has a lower dividend yield than some other dividend-focused ETFs: It recently yielded around 1.7%. However, the fund should still deliver attractive total returns in the future as the underlying companies grow their earnings and dividends, which should steadily increase their stock prices.
A smart investment strategy
Dividend growth stocks have historically outperformed other dividend stocks and dividend non-payers over the long term. Given its focus on dividend growth stocks, buying the Vanguard Dividend Appreciation ETF is wise. The fund should deliver strong total returns over the decades, which should enable investors to meaningfully increase their wealth by buying and holding this fund.
