VTI - VIG: Why The Dividend Growth Model Works

2024-04-24 12:42:47 ET

Summary

• Dividend investing is a consistent and successful investment model that focuses on businesses that distribute cash to shareholders.
• The Vanguard Dividend Appreciation Index Fund is a large, liquid exchange-traded fund that invests in large-cap equities with a history of increasing dividends.
• VIG's success is driven by factors including growing cash flow which drives share price growth.
• We explore VIG's success and provide an expense analysis against competing funds.

Dividend investing remains one of the most fundamentally successful investing models. As different investing styles come and go, income investing remains one of the most consistent investing methodologies. Dividend investing dictates identifying businesses that distribute cash to shareholders as incentive to remain invested. The value offered to shareholders follows the logic of “a bird in the hand is worth two in the bush” in addition to the appeal of receiving cash payments on a consistent basis.

The cash distribution to shareholders is financially neutral as it comes directly from funds that could have otherwise been reinvested in the business. However, many mature businesses lack the growth opportunities to realistically reinvest large amounts of capital into their business. As a result, they prioritize the dividend to attract investors. Dividends are common amongst the largest companies in the world. Despite moving further out of favor to more tax efficient forms of financial engineering, such as stock buybacks, new companies, including Meta Platforms (META), continue initiating dividends and rewarding their shareholders with cash....

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