The Vanguard Dividend Appreciation ETFs aren’t strictly income-focused; they serve as better growth options for long-term investors.
The Vanguard Dividend Appreciation ETF might mislead some investors with its name. The inclusion of “dividend” suggests it’s all about generating income. But then again, “Appreciation” hints at something else entirely. If you’re considering a long-term investment, this isn’t necessarily a downside. Here’s what you should know.
What does the Vanguard Dividend Appreciation ETF do?
When it comes to exchange-traded funds, the Vanguard Dividend Appreciation ETF is quite straightforward. It tracks the S&P US Dividend Growers Index. The process starts by focusing on companies that have raised their dividends for at least ten years. Then, it removes the top 25% of stocks, purchasing the remainder based on market capitalization.
Given the selection criteria, a few key elements stand out. For one, this isn’t designed as an income-driven ETF. This choice deliberately keeps out the highest-yield stocks. It’s a sensible move considering that even top-performing stocks can have financial troubles that might hinder growth.
Secondly, by filtering out the higher-yield stocks, the Vanguard Dividend Appreciation ETF can concentrate on companies that are more likely to grow. Interestingly, companies with the fastest growth often yield the least.
Lastly, this ETF serves as a growth vehicle that screens stocks through their dividends. Achieving a ten-year streak of dividend increases is quite an accomplishment. This initial filter eliminates many lower-quality investments even before the final cut of 25% is made.
What can you really expect from the Vanguard Dividend Appreciation ETF?
The chart indicates that Vanguard’s Dividend ETFs tend to deliver a consistently growing dividend over time, along with rising stock prices. This combination of income growth and capital gains is appealing—especially if you’re younger and have time on your side. If you start investing early and maintain your position long enough, dividend growth could turn into a significant revenue stream down the line.
Additionally, with a cost ratio of just 0.05%, the ETF is relatively inexpensive. It doesn’t engage in complicated stock selection processes, but you won’t pay a hefty price, either.
However, if you’re expecting a substantial income today, the yield is about 1.7%. While that’s better than the 1.2% from a typical S&P 500 index, it still may not meet those aiming to maximize income right now. So, the “Appreciation” aspect probably carries more weight than the “dividend” part.
The Vanguard Dividend Appreciation ETF fulfills its purpose
If your focus is on immediate income, the Vanguard Dividend Appreciation ETF may not be what you want. But if you take a long-term view, the mix of capital appreciation and dividend growth could yield solid returns as you approach retirement.
