Dividend stocks can be a great way to generate excellent total returns in your portfolio over time, and to create a nice income stream after you retire. However, dividend stocks that raise their payout year after year are even better. One exchange-traded fund, or ETF, that allows you to invest in a diverse portfolio of dividend growth stocks without high fees is the Vanguard Dividend Appreciation ETF (VIG -0.30%).

Here's a closer look at the fund's investment strategy, the stocks it owns, and what investors should know before adding it to their portfolio.

Jar of coins labeled dividends.

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What is the Vanguard Dividend Appreciation ETF?

The Vanguard Dividend Appreciation ETF is an index fund that tracks the NASDAQ U.S. Dividend Achievers Select Index. In a nutshell, this is an index of companies that have a strong track record of increasing their dividends every year.

For example, the fund's three largest holdings, Microsoft, Visa, and Procter & Gamble have increased their dividends for 15, 10, and 62 consecutive years, respectively.

The fund holds a total of 183 different stocks, and while the index is weighted, there isn't too much concentration in the largest positions. Only six stocks make up more than 3% of the fund's total assets, and no stock makes up more than 4.4%.

There is also lots of sector diversification, as the fund has over 10% of its assets in each of five different sectors -- consumer goods, consumer services, financials, healthcare, and industrials. Since its 2006 inception, the fund has generated annualized total returns of 8.75%, which translates to an overall total return of 193% in that 13-year time frame.

VIG Total Return Price Chart

VIG Total Return Price data by YCharts.

Reasons to invest in the Vanguard Dividend Appreciation ETF

  • The Vanguard Dividend Appreciation ETF allows you to get the benefits of dividend growth stocks in your portfolio without relying too heavily on any particular stock. No stock makes up more than 4.4% of the fund's assets.
  • With an annual expense ratio of just 0.08%, the Vanguard Dividend Appreciation ETF is an inexpensive way to get exposure to nearly 200 dividend stocks. This means that for every $10,000 you have invested, only $8 is going toward management and administrative fees each year.
  • Dividend stocks, particularly those that have a history of raising their payouts every year, tend to hold up better in turbulent markets better than their non-dividend counterparts. So, this ETF can also be a smart buy if you are worried that there's a significant change of a recession or market correction in the not-too-distant future.

Obviously, if you'd rather choose your own stocks, the Vanguard Dividend Appreciation ETF isn't a great fit for you. This fund (like most other index funds) is designed to allow investors to put their dividend growth investing on autopilot.

The bottom line on the Vanguard Dividend Appreciation ETF

Dividend growth stocks are a great way for long-term investors to achieve strong returns, and the Vanguard Dividend Appreciation ETF takes the guesswork out of the picture. Over time, dividend growth stocks as a whole have performed quite well (total returns averaging 9%-10% per year), and this fund essentially guarantees that you will do just as well as the overall index.