VIG - 3 ETFs To Compound Your Wealth
2023-09-27 10:37:00 ET
Summary
- A successful portfolio tends to have a strong backbone, which usually comes by way of ETFs or Index Funds.
- All three of these ETFs have high-quality top investments that are leaders within their respective industries.
- SCHD is the king of dividend ETFs as it offers a good mix of growth potential, higher dividend yield, and strong dividend growth.
When it comes to dividend investing, you have a few options, you can buy the stocks of individual companies that pay a dividend, which can come with higher risk/reward, or you can take a much more diversified and safer approach and invest in ETFs or Exchange Traded Funds.
ETFs often hold hundreds of stocks, sometimes thousands, making them a great option for those looking to add diversification to their portfolio.
Today, I am going to cover three separate dividend paying ETFs that can compound your wealth. All three of these Dividend ETFs have great potential.
3 Dividend ETFs To Compound Your Wealth
Dividend ETF #1 - Vanguard Dividend Appreciation ETF ( VIG )
The Vanguard Dividend Appreciation ETF focuses on dividend growth stocks, companies that consistently increase their dividend year in and year out. Usually with dividend growth, whether its individual stocks or ETFs, the yield tends to be lower but the dividend growth is consistent and outpacing inflation on an annual basis.
VIG was an ETF launched back in 2006, so it has been around for a while now, and it is managed by The Vanguard Group. The ETF replicates the S&P US Dividend Growers Index, so as you can imagine, dividend growth is front and center. VIG has $69 billion in assets under management, or AUM. The ETF has a low expense ratio of just 0.06%.
Over the past 5 years, the ETF is up 57%, on a total return basis, underperforming the S&P 500 by only 6%.
VIG is an ETF that provides a good balance of growth, dividend growth, and diversification to provide a level of safety, not being overly exposed to one particular sector. Here is a look at the ETFs sector breakdown:
Technology owns the top spot with a near 23% exposure rate followed by Financials and Health Care. Now let's look closer at the top positions.
It should be no surprise to see Microsoft ( MSFT ) and Apple ( AAPL ) having the top spots given that Technology is the top sector. After those top two positions, you can see the diversification amongst various sectors.
The ETF has a total of 317 total positions, so not as many as the S&P 500 but still large nonetheless. The top 10 holdings account for 31% exposure with no single positions accounting more than 4.82% of the fund.
In terms of the Dividend, over the past 12 months the ETF has distributed $3.11 per share which equates to a dividend yield of 1.9%. On top of that, investors have seen the dividend increase for 9 consecutive years with a 5-yr DGR close to 10%.
Overall, VIG is very well rounded with Technology as the top sector, and some great top holdings. The ETF focuses on dividend growth and also comes with a low expense ratio, which is another positive to this solid ETF.
Dividend ETF #2 - Pacer US Cash Cows 100 ETF ( COWZ )
This next ETF is one that I have not covered for a while, so it was fun to dive back into this ETF. When it comes to dividend stocks, one of the primary things you need as a company, in order to pay that dividend, is Free Cash Flow.
Far too often new investors focus on Net Income and the payout ratio, but the more important thing to look at is FCF and the FCF yield and payout ratio. That is exactly what the COWZ ETF does, and if that's not the best ETF name, it's certainly up there.
The Pacer US Cash Cows 100 ETF focuses on screening the Russell 1000 for the top 100 companies based on free cash flow yield. For those unaware, FCF is the cash remaining after paying all your operating expenses, interest, taxes and long-term investments. FCF is what is used to pay dividends, pay down long-term debt, reinvest into the business.
The top 100 companies with the highest trailing 12 month free cash flow yield make the cut and the ETF is weighted by Cash Flow Yield. During rebalancing, no position can exceed a 2% exposure rate, and that rebalancing process happens on a quarterly basis.
The ETF has an expense fee of 0.49% and AUM of $15 billion. Over the past 12 months, shares of COWZ have climbed 17%.
Here is a look at the sector breakdown for the ETF:
Energy is far and away the largest sector with a 32.5% exposure rate, followed by Health Care and Consumer Cyclical. Given this, you do want to ensure you are comfortable having this large of an exposure rate to Energy before investing in an ETF like COWZ. Of late, Energy has been a top performing sector within the S&P 500.
Now when we look at the top 10 list, it should not surprise you that Energy dominates, but again, no position starts above 2% at the time of rebalancing, but they can grow beyond that with the increase in their share price. The funny part is that the top position is actually CVS Health ( CVS ).
Those top 10 stocks make up 21% and in total, COWZ has 103 total positions.
In terms of the dividend, over the past 12 months the ETF has distributed $0.95 per share which equates to a dividend yield of 1.9%. The ETF also has a 5yr DGR of 10.3% as well, so the dividend stats are very similar from what we just saw with VIG.
Dividend ETF #3 - Schwab U.S. Dividend Equity ETF ( SCHD )
This third ETF is a favorite among many and a king in the dividend ETF world. SCHD is the most well known Dividend ETF and they currently have AUM of nearly $50 billion and a low expense fee of just 0.06%, which is in line with the first ETF we looked at, VIG.
What is it that makes SCHD so popular? When it comes to dividend stocks or ETFs, there is usually one of three things that an investment can offer:
- Growth , maybe the stock pays a small yield but you can get good growth potential, something like AAPL
- High-Yield , usually means less growth but you get more income from dividends
- Dividend Growth is when you have a yield that is growing at a rate of 10% or more per year
The unique thing about SCHD is the fact that it offers all three to a degree. Now, that has not been the case in 2023 due in part to big technology companies largely leading the charge, an area SCHD is not overly exposed to. SCHD gives you some great diversification, a yield higher than some “high-yield” dividend ETFs and dividend growth faster than many dividend growth ETFs.
Let's take a look at the sector breakdown:
The top three sectors include: Industrials, health care and financials. These three sectors make up roughly 50% of the fund. Not until the fifth largest sector do you find technology.
As I mentioned, technology and communications have been the far and away leaders in 2023 but they only account for 11.6% and 4.6%, respectfully.
When rallies are sharp and one-sided towards technology, an ETF like SCHD is not going to outperform, but at the same time it offers a level of security due to how diverse they are.
Here is a look at the Top 10 holdings:
These top 10 stocks account for 40% of the entire fund and in total, SCHD has 104 total positions.
In terms of the dividend, over the past 12 months the ETF has distributed dividends of $2.62 per share which equates to a dividend yield of 3.7%. The ETF also has a 5yr DGR of 14%, having seen the dividend increase for 11 consecutive years.
Investor Takeaway
ETFs are the best way to build out a portfolio as it is a safer and easy way to diversify your portfolio from the start. Successful investors tend to have solid foundations, which usually come by way of an ETF or Index Fund.
All three of these ETFs are well diversified and all three can be both a foundational position as well as an ETF to compound your wealth for years to come.
These ETFs all have differences from one another, but SCHD is far and away the most well-rounded. However, its lack of technology exposure has caused it to underperform in a year like 2023. However, when the rally broadens out, SCHD will do just fine.
COMMENT BELOW: Which of these 3 ETFs do you like Best?
Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.
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3 ETFs To Compound Your Wealth