VIG - VIG: A Diversified Low-Price Option For Dividend Growth Investors

2023-10-17 23:54:15 ET

Summary

• Vanguard Dividend Appreciation Index Fund ETF offers attractive long-term returns for dividend investors.
• VIG focuses on companies with a history of growing dividends, providing a potential offset to the effects of inflation.
• The fund is well-diversified and includes top companies in various industries, making it a balanced dividend play.
• The ETF is still in a buy-the-drop kind of situation.

The Vanguard Dividend Appreciation ETF (VIG) is an attractive investment option for dividend investors who want to build long-term wealth and put this wealth-building on auto-pilot. The ETF is currently in a buy-the-drop kind of situation, in my opinion, and it offers investors a long-term opportunity to invest in the largest, dividend-paying and dividend-growing companies in the U.S. Additionally, given the attractive long-term returns of the ETF, I believe the Vanguard Dividend Appreciation ETF can serve as a vehicle for dividend investors to offset the effects of inflation going forward as well.

Attractive long-term returns for long-term investors

The Vanguard Dividend Appreciation ETF benchmarks the Spliced S&P U.S. Dividend Growers Total Return Index and invests chiefly in large U.S. companies that have a history of growing their earnings as well as their dividends. The Vanguard Dividend Appreciation ETF seeks to generate long-term value for ETF investors by harnessing the power of dividend growth and the fund has so far done quite well: since its inception in 2006, the Vanguard Dividend Appreciation ETF returned an average annual rate of 8.9%.

The ETF has seen an exceptionally strong performance in the last year, with a 1-year return of 17.2% which was almost twice as high as the longer-term fund return. I believe the ETF is still in a kind of buy-the-drop situation as it is trading 6% below its 1-year high at $167.33.

One key reason why investors would want to own the Vanguard Dividend Appreciation ETF

By far the biggest industry represented in the Vanguard Dividend Appreciation ETF is Information Technology which had a share, as of the end of the September quarter, of 22.1%. Financials were the second-biggest sector with a percentage of 18.3%, followed by Health Care with a 15.4% share. Other sectors include recession-resistant sectors such as Utilities, Consumer Staples, and Communication Services.

The Vanguard Dividend Appreciation ETF has a number of core holdings that include the largest companies in the U.S. in a variety of industries: the VIG's top ten holdings include financial institution JPMorgan Chase & Co ( JPM ), leading drug manufacturers like Johnson & Johnson ( JNJ ) and software company Microsoft ( MSFT ). Microsoft is VIG's largest position with a share of almost 5%.

The ETF's core holdings have a history of growing their dividends over long periods of time which makes the Vanguard Dividend Appreciation ETF a potentially attractive ETF for investors who want to focus on building their wealth and reinvesting their dividends. Additionally, the Vanguard Dividend Appreciation ETF may be an attractive bet for investors who want to hedge against inflation... because what better way is there to protect against the rise in prices than to invest in a diversified portfolio of companies that raise their dividends?

Inflation only has become a big issue for investors in the last two years as aggressive fiscal spending and monetary easing during the pandemic caused inflation rates to spike for the first time in decades.

With Vanguard Dividend Appreciation ETF achieving 9% annual returns since 2006, I believe the ETF may be a good option for dividend investors who are concerned about the rise in consumer prices. While inflation has tapered off in the last year, it is seeing signs of a resurgence in the last three months.

Other reasons for long-term investors to buy the VIG

The Vanguard Dividend Appreciation ETF offers a diversified pathway for dividend investors to invest in companies that are growing their dividends. Most of the VIG's top holdings (the top five are presented below) are growing their dividends which should lead to growing dividend income from the VIG over time. Dividend investors should want to reinvest as much of their ETF distributions as possible in order to compound and build long-term wealth. Additionally, the ETF charges only 0.06% in fees, resulting in a cost-effective way to invest in a large portfolio of dividend-paying stocks.

Risks with VIG

The big risk with the Vanguard Dividend Appreciation ETF is that the dividend or value segment may go out of favor with investors. Temporarily, or for longer periods of time, the market may favor the growth category... which could lead to disappointing total returns for ETF holders. Considering that the ETF is widely diversified and includes many different industries, especially recession-resistant ones like Health Care or Telecommunications, I believe the fund offers dividend investors reasonable downside protection despite its IT focus.

Final thoughts

Despite the risks that come with an investment in a dividend-focused ETF, I believe the VIG is broadly enough diversified to suggest that investors are getting a balanced dividend play with the Vanguard Dividend Appreciation ETF. The fund is also accessible to investors at a low price (0.06% in fees are deducted from the fund's balance annually) and includes some of the largest companies in the U.S. economy. Given that the Vanguard Dividend Appreciation ETF also achieved reasonable long-term returns approaching 10% annually, the fund may also be an option for investors who are concerned with earning the inflation rate going forward.

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