Home to $32.8 billion in assets under management at the end of the first quarter, the Vanguard Dividend Appreciation ETF (NYSE: VIG) is the largest U.S. dividend exchange traded fund.
VIG has attained that massive following due part to its emphasis on dividend growth stocks. The fund's underlying index, the NASDAQ US Dividend Achievers Select Index, requires member firms to have boosted payouts for at least 10 consecutive years.
Over the past three years, VIG is lagging the S&P 500 by 200 basis points, but the dividend fund has been less volatile than broader domestic equity benchmarks over that period. While dividend strategies will lag the broad market from time-to-time, VIG's focus on steady payout growth comes with plenty of advantages for income investors.
“This strategy focuses on dividend growth rather than dividend yield,” said Morningstar in a recent note. “This approach reduces the fund's exposure to firms with weak fundamentals that may not be able to sustain their dividend payments, which is a risk that often accompanies a narrow focus on yield.”
Why It's Important
VIG is home to 185 stocks with a median market capitalization of $87.7 billion, accentuating the fund's status as large/mega-cap fund. With the 10-year dividend increase streak requirement, VIG is lightly allocated to some sectors that are traditionally viewed as high-yield destinations, sectors that have only recently started boosting dividends and groups that have recently negative dividend action -- think banks during the financial crisis or energy companies during the 2015 oil bear market.
Industrial and consumer staples stocks combine for 47.6 percent of VIG's weight while the financial services and health care sectors combine for 23.6 percent. VIG's top 10 holdings combine for 34.1 percent of the fund's weight. Six of those stocks, including the top five, are members of the Dow Jones Industrial Average.
“As of this writing, the strategy's dividend yield of 2 percentage points annually matches the dividend yield of the Russell 1000 Index,” according to Morningstar. “But the strategy's tilt toward more-stable stocks has helped it shine during market downturns. Its drawdown during the bear market from October 2007 through March 2009 measured 9 percentage points less than the Russell 1000 Index's drawdown.”
To be precise, VIG yields 1.96 percent, which is close to the dividend yields on the S&P 500 and the Russell 1000 Index. Focusing on dividend growth over yield, however, can lead to a portfolio with companies sporting better balance sheets than high yielders and, as VIG proves, less volatility.
Morningstar has a Gold rating on VIG.
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