Investing in Vanguard Dividend Appreciation ETF Today: A Potential Lifelong Financial Strategy?
The Money-Boosting Vanguard Dividend Appreciation ETF (VIG 0.24%) - here's the lowdown you need!
What does Vanguard Dividend Appreciation ETF do exactly?
This ETF is all about tracking the S&P U.S. Dividend Growers Index. This index isn't rocket science. It selects U.S. companies that have boosted their dividends for at least ten years in a row. It then axes the top 25% with the highest dividend yields because they could potentially become yield traps, risking a dividend cut. The remaining companies make it into the index and, consequently, the Vanguard Dividend Appreciation ETF. The stocks are market-cap-weighted, with influential companies having the most impact on the performance.
Taking a step back, the Vanguard Dividend Appreciation ETF delivers on its promise, given its name. Eliminating the highest-yielding 25% of investment options is logical since it likely removes stocks with a high risk of a dividend cut. If a diversified collection of stocks that consistently increase their dividends is your jam, Vanguard Dividend Appreciation might be the perfect match.
But it's essential to determine if it's the ideal ETF for you.
How does Vanguard Dividend Appreciation ETF measure up?
For starters, Vanguard Dividend Appreciation ETF's 1.8% dividend yield outshines an S&P 500 ETF like Vanguard S&P 500 ETF (VOO 0.52%), which typically has a 1.3% yield. However, 1.8% might not be a substantial yield on its own. The Schwab U.S. Dividend Equity ETF (SCHD 0.11%), with around a 4% yield, provides better returns.
Data sourced from YCharts.
Schwab U.S. Dividend Equity ETF screens for U.S. stocks that have increased dividends for ten years. It focuses on acquiring high-quality, growth-oriented companies with attractive yields. By leaning more toward yield, the Schwab U.S. Dividend Equity ETF emerges as a better choice if income production is your top priority.
For those more interested in appreciation over income, comparing Vanguard Dividend Appreciation ETF's total return to the Vanguard S&P 500 ETF's paints a gloomy picture. As the chart below demonstrates, purchasing the S&P 500 index would have resulted in a significant improvement in total return.
Data sourced from YCharts.
In essence, you can achieve better yields with a more precise investment approach like the one offered by Schwab U.S. Dividend Equity ETF. For total return, a simple S&P 500 tracking ETF may yield better outcomes. With dividends and appreciation being the main reasons for purchasing Vanguard Dividend Appreciation ETF, it may not be an enticing option.
A decent ETF, not exceptional
To be fair, Vanguard Dividend Appreciation ETF isn't a terrible ETF. It should continue delivering investors a reasonably steady stream of dividends and some capital appreciation over time. If you appreciate companies that routinely enhance their dividends, Vanguard Dividend Appreciation ETF could serve your needs. However, if you seek to maximize either income or capital appreciation, there are evidently better alternatives available.
- In personal-finance terms, investing in the Vanguard Dividend Appreciation ETF could provide a steady income stream, given its focus on U.S. companies that have increased their dividends for at least ten years.
- For those prioritizing higher yields, finance experts suggest considering the Schwab U.S. Dividend Equity ETF, which offers a more targeted investment approach and yields around 4%.
- When comparing the total return of the Vanguard Dividend Appreciation ETF to a simple S&P 500 tracking ETF, finance experts advise that the S&P 500 index might yield better outcomes for capital appreciation.
