Dividend stocks make a fantastic addition to any long-term portfolio for two reasons.
First, companies that pay dividends generally have a strong financial situation -- allowing them to make these payments -- so when you buy a longtime dividend stock, you are often buying shares of a quality company. Second, these companies offer you passive income just for buying their shares, so no matter what the market is doing at a given time, this investment will offer you a regular payment.
You can, of course, select dividend stocks one by one, but there's also a way to gain immediate exposure to more than 300 companies known for increasing their dividends year after year. And this is by investing in an exchange-traded fund (ETF) -- specifically, the Vanguard Dividend Appreciation ETF (VIG -1.65%).
But it's important to note that, after recent gains, this ETF now is trading close to a record high -- is it still a buy? Let's find out.
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ETF investing
First, let's talk a bit about ETF investing. If you usually invest in stocks but haven't yet tried an ETF, not to worry -- the process is simple. You buy or sell them exactly as you would buy or sell a stock. The big difference is, in ETF investing, you do have to pay fees. But again, there's no reason to worry because these fees, shown as an expense ratio, generally are very low.
The Vanguard Dividend Appreciation ETF's expense ratio is only 0.05%, and Vanguard, as part of its broad decrease in fees, recently lowered it to that level from 0.06%. (In any case, no matter which ETF you choose, always be sure to buy one with an expense ratio of less than 1% so that fees won't take a chunk out of your returns.)
ETFs make a smart addition to your portfolio because they offer you exposure to many stocks with just one purchase. This means you don't have to spend a lot of time researching companies, an industry, or an investing theme. Through a quality ETF you can gain access to the best players in a particular space -- and in this case, we're talking dividend growth.
The Vanguard Dividend Appreciation ETF, mimicking the composition and performance of the S&P U.S. Dividend Growers Index, invests in 338 stocks spanning 10 industries. The most heavily weighted industries are technology, financials, and healthcare, and the ETF includes Broadcom, Eli Lilly, and JPMorgan Chase among its biggest holdings.
The major dividend stocks of the moment
And since the index and ETF may add or remove stocks if their dividend policies change, you can be sure that through this investment you'll always own a part of the major dividend growers of the moment. So, through this fund, you benefit from fund performance and dividend growth -- as you would from investing in a dividend stock. But instead of depending on just one stock, which can be risky, your investment is linked to the stories of many.
So, this Vanguard fund clearly is a solid one to own over time. But, considering its increase in recent times, is now still a good time to buy this ETF?
It's true that the Vanguard fund is trading close to its record high.
But it's important to note that the fund, as you can see in the chart, over time has traveled a pretty smooth path upward. Even when it's reached record highs, it's gone on to advance past them -- not in sharp spikes, but at a gradual pace.
Meanwhile, its trailing-12-month price-to-earnings ratio is about 24, which is reasonable for an investment offering you exposure to so many well-established dividend players. Importantly, if you plan on investing for a number of years -- and that's the best way to invest to maximize your returns -- it won't matter that you didn't get in on this ETF at its lower level a few weeks ago. This won't impact your long-term performance by much at all.
All of this means that, yes, even close to its high, the Vanguard Dividend Appreciation ETF is a fantastic buy today for passive income and performance that could boost your portfolio over time.
