The Vanguard Dividend Appreciation ETF (VIG +0.78%) isn't the most popular exchange-traded fund (ETF) on the market. With $83.7 billion in assets under management, it's not even among the five largest ETFs in the Vanguard family. But it is the biggest name in dividend-oriented ETFs, making it a leading choice for income investors who don't want to worry about picking individual dividend stocks.
So this Vanguard fund is well respected, but is it a good ETF to buy right now? I'll help you take a look. First, let's see what makes this ETF tick.
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Inside the Vanguard Dividend Appreciation ETF
As usual, Vanguard isn't hand-picking stocks for this ETF. It's actually an index fund, tracking the components of the S&P U.S. Dividend Growers index. By handing off the heavy research work to another organization -- S&P Global (SPGI +1.05%) in this case -- Vanguard can automate the fund management and offer the resulting ETF with very low management fees.
So I need to take one more step to figure out how this ETF is designed. As it turns out, the underlying market index picks out proven dividend growth stocks among companies headquartered in the United States.
There's a minimum requirement for the stock's daily dollar-based trading volume. Real estate investment trusts (REITs) aren't allowed because they belong in a different S&P index. Each candidate must have increased its annual dividend payout for at least the last 10 years. Oh, and the highest-yielding 25% of this filtered list are also excluded. The idea here is to reduce the risk that often comes with excessive yields.
That's the selection process. Easy-peasy. Buying shares of the Vanguard Dividend Appreciation ETF gives you exposure to more than 300 consistent dividend growth stocks. The ETF is weighted by market cap, and Vanguard charges a tiny annual fee of 0.05%.
Comparing the Vanguard Dividend Appreciation ETF to its famous S&P 500 cousin
The resulting stock list has a lot in common with the better-known Vanguard S&P 500 ETF (VOO +1.00%). Apple (AAPL +1.08%) and Microsoft (MSFT +1.08%) are the two largest holdings on both lists. Despite the dividend fund's focus on high-quality payouts, its 1.9% yield is just a little bit higher than the S&P 500 ETF's at 1.4%. Their long-term performance tends to be quite similar, whether you account for reinvested dividends or not:
But there are significant differences, too. The third- and fourth-largest holdings in the dividend fund are Broadcom (AVGO +0.83%) and JPMorgan Chase (JPM +0.96%). Their rankings on the general S&P 500 list are No. 8 and No. 11, respectively. Many of the leading S&P 500 stocks are not in the habit of paying dividends at all, not to mention raising their payouts every year.
The sector-by-sector composition is very different, too. As expected, the dividend appreciation fund owns more stocks in the industrial, healthcare, and finance segments, with a milder focus on consumer goods and technology.
Finally, it's less top-heavy than the ordinary S&P 500 tracker. The top five holdings in the dividend ETF add up to 18.3% of the total portfolio, compared to 24.9% for the five largest S&P 500 components. From this point of view, the smaller fund with just 338 components is more diversified than the 505-ticker S&P 500 ETF.
Who should consider this dividend-focused ETF right now?
Now you know what the Vanguard Dividend Appreciation ETF looks like, and it's time to answer the real question on everyone's mind: Is it a good ETF to buy in April 2025?
Most people should prefer the good old S&P 500 fund, most of the time. Its modest long-term performance advantage can make a significant difference when you're building a nest egg over decades.
But I understand if you prefer a more balanced portfolio in these uncertain times. The tech giants that recently lifted the S&P 500 to all-time highs might be due for a price correction, after all. It's not easy to keep the growth engines running in every possible economy. And the lower-risk dividend fund does have a history of strong performance in troubled times.
The S&P 500-beating periods tend to be fairly short, though. Even if you time your market calls to perfection, you'd still probably be better off in five or 10 years with the ultra-reliable S&P 500 ETF under your belt.
Then again, everyone's financial situation is unique. The Vanguard Dividend ETF can be the way to go if you prefer its blend of stable stocks, robust dividend payouts, and broader diversification. So I'm not throwing this interesting fund under the bus. It can be the right fund for some people, especially in a shaky economy like the current situation. Still, you should take a closer look at the standard S&P 500 option before committing too much capital to this idea.
