Do you hope to retire some day and spend your golden years doing what you want and how you want to do it? If you're like most people, the answer to the question is a resounding "yes!" If you're also like most people, though, doing so means you're going to have to save and invest between now and then.
Good news: It's possible to live the dream even earning an average income, and without a complicated portfolio. The Vanguard Dividend Appreciation ETF (VIG +0.16%) is a great all-around exchange-traded fund that's at home in almost any retirement account intended to serve as a personal nest egg.
It's complicated
Just as the name suggests, the Vanguard Dividend Appreciation ETF consists of stocks with a strong track record of raising their annual dividend payouts. It specifically aims to mirror the Nasdaq US Dividend Achievers Select Index, which is made up of around 250 hand-picked names that have increased their annual dividends for at least 10 consecutive years.
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Contrary to the name, the index isn't limited to Nasdaq Exchange listings. The index's -- and therefore the fund's -- two biggest holdings are JPMorgan Chase (JPM 0.26%) and Johnson & Johnson (JNJ 0.44%), both of which are New York Stock Exchange-listed tickers.
Given that it's being featured as a top prospect, one would assume this dividend-growth fund boasts superior returns; dividends are real, whereas too many growth stocks fail to live up to the hype. One would be wrong to make such an assumption, however. Morningstar data indicates this particular exchange-traded fund not only trails the S&P 500's performance for the past 10 years but it's also trailed the S&P 500 the entire 10-year span. And that's with the fund's dividends (and/or distributions, in this case) being reinvested, mind you. Accepting those payments in the form of cash would further lower the current value of a position in VIG.
Nevertheless, this is a smart name to tuck away in an IRA for the long haul, for a handful of reasons.
Why the Vanguard Dividend Appreciation ETF is a top prospect
The ETF's subpar performance isn't as much a failure as it is an unfair comparison. Missing from the Nasdaq US Dividend Achievers Select Index are names like Amazon, Apple, and Facebook -- names that generally don't have enough of a dividend or dividend history to speak of, but that have led the S&P 500 higher over the course of the past decade.
It seems a liability on the surface. That is to say, this fund doesn't own the market's hottest growth names. But that's the point. Many veteran investors can attest to the fact that the market's darlings fall in and out of favor over and over again. Yesterday's winners aren't necessarily tomorrow's leaders. Indeed, many Wall Street types are now suggesting we're on the cusp of a period that favors value names over growth stocks, which bodes well for dividend-paying names.
The other key element to the bullish argument for VIG is the achievement of the fund's goal. Its constituents have grown their dividends, which has increasingly enriched shareholders. The Vanguard Dividend Appreciation ETF's trailing-12-month cash distribution of $2.41 per share is 36% better than the fund's payouts from just five years ago, and roughly twice the quarterly payouts from 10 years back.
Granted, the absolute yield for newcomers isn't exactly thrilling even if it's growing. The fund currently sports a dividend yield (equivalent) of 1.5%, which is a lower yield than an alternative dividend-oriented fund like the SPDR S&P Dividend ETF (SDY +0.19%). Its present yield is 2.5%.
Keep it in perspective, though. VIG's payout is growing at a faster clip, and you're gaining exposure to some of the market's very best dividend-paying blue chips that are also still capable of significant capital appreciation.
The X-factor: Remember, just because dividend reinvestment in more of the same dividend-paying stocks or funds is an option (and usually free), it doesn't mean you have to do so. You can accept those dividends as cash, even if your plan is to buy other dividend-paying holdings with that money. You can also change your mind about reinvesting or not reinvesting dividends, and do so as often as you wish. This oft-ignored flexibility is helpful to investors in and of itself.
Don't sweat the rating
Finally, disciplined investors might balk at Morningstar's relatively low three-star rating of the Vanguard Dividend Appreciation ETF. Don't be swayed into such doubt.
As was discussed, this ETF rates merely as average largely because of its below-average performance compared to benchmarks like the S&P 500. The lag, however, mostly reflects the fact that the fund doesn't hold the past decade's very biggest winners by design. Strategic investors are rightfully more focused on the plausible future rather than the past, and the plausible future looks bright for the market's top dividend-growing names now that familiar growth names may be bumping into more significant headwinds.
