Over the last 50 years, the typical company in the S&P 500 has delivered an average annual total return of 7.7% if we go by the returns of an equal-weighted S&P 500 index. However, there's a wide variation of returns within that index. For example, dividend payers have outperformed dividend non-payers by more than two to one, according to data by Ned Davis Research and Hartford Funds (9.2% average annual total return compared to 4.3%).
There has also been a wide variation of returns among dividend stocks:
|
Dividend Policy |
Average Annual Total Returns |
|---|---|
|
Dividend growers and initiators |
10.2% |
|
No change in dividend policy |
6.8% |
|
Dividend cutters and eliminators |
-0.9% |
Data source: Ned Davis Research and Hartford Funds.
That data suggests that investing in companies that grow their dividends should yield the best returns over the long term.
Vanguard makes it easy to invest in these top-performing dividend stocks through its Vanguard Dividend Appreciation ETF (VIG 0.68%). The fund tracks the S&P U.S. Dividend Growers Index, which, as the name suggests, aims to measure the performance of companies that consistently increase their dividends. Because of that, it's a great ETF to buy and hold for the long haul. It should be able to grow a $1,000 investment into a much bigger future payday.
Image source: Getty Images.
Focused on the best dividend growth stocks
The Vanguard Dividend Appreciation ETF has a very straightforward investment strategy of matching the holdings of the S&P U.S. Dividend Growers Index. That index aims to measure the performance of companies that have increased their dividend payments every year for at least the past decade. It also excludes the top 25% highest-yielding stocks eligible for the list because companies with higher dividend yields tend to be at a higher risk of reducing their payouts. The net result is an index focused on the best dividend growth stocks in the stock market.
That's actually a pretty big list. The fund currently holds 338 companies across most market sectors. Here's a look at its top 10 holdings:
|
Dividend stock |
Fund Weighting |
Current Yield |
Consecutive Annual Dividend Increases |
|---|---|---|---|
|
Broadcom |
4.2% |
1% |
14 |
|
Microsoft |
4.1% |
0.7% |
20 |
|
Apple |
3.8% |
0.5% |
14 |
|
Eli Lilly |
3.7% |
0.8% |
11 |
|
JPMorgan Chase |
3.6% |
2.1% |
15 |
|
Visa |
3% |
0.7% |
16 |
|
ExxonMobil |
2.4% |
3.7% |
43 |
|
Mastercard |
2.4% |
0.5% |
14 |
|
Costco Wholesale |
2.3% |
0.5% |
20 |
|
Walmart |
2.2% |
1% |
50 |
Data source: Vanguard.
The fund's top 10 holdings have a more than 30% weighting, so they contribute more to its results. However, as the table shows, they have excellent histories of growing their dividends.
Strong returns
The Vanguard Dividend Appreciation ETF's focus on dividend growth stocks has enabled it to produce strong total returns over the years. Since its formation in 2006, the fund has produced an average annualized total return of around 9.7%. That would have grown a $1,000 investment made back then into over $5,000 today:
VIG Total Return Level data by YCharts
While that past performance doesn't guarantee the fund will produce similar results in the future, its focus on dividend growers puts it in a strong position to continue producing attractive total returns. The underlying companies in the fund should continue growing their earnings at above-average rates (its current holdings have grown their earnings at an 11.3% annual rate over the past five years). That has supported strong dividend growth and total returns for the fund (13.1% average annual total return and more than 55% increase in dividends paid by the fund over the last five years).
Focused on proven wealth growers
Dividend growth stocks have historically delivered the highest total returns. By focusing on these proven wealth creators, the Vanguard Dividend Appreciation ETF should steadily grow in value as the underlying companies it holds increase their earnings and dividends. The proven success of dividend growth stocks makes the Vanguard Dividend Appreciation ETF a great fund to buy and never look back.
