Vanguard Dividend Appreciation ETF (VIG 0.46%) is an interesting exchange-traded fund (ETF). It has the word dividend in the name, but it really doesn't have a high yield at around 1.8%. Is this an ETF that could set you up for life, or would it actually set you up for disappointment?
Here's what you need to know.
What does Vanguard Dividend Appreciation ETF do?
The Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index. This index is fairly simple. First, it pulls out all of the U.S. companies that have increased their dividends for at least 10 consecutive years. And then it removes the 25% with the highest dividend yields because these companies have a greater chance of being yield traps that could potentially cut their payouts. Everything else gets into the index and into the Vanguard Dividend Appreciation ETF. The stocks are market-cap-weighted, so the largest companies have the greatest impact on performance.
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When you step back and examine the ETF's name, Vanguard Dividend Appreciation ETF pretty much does what it says it does. Even eliminating the highest-yielding 25% of investment candidates is logical, given that it likely removes stocks that are at the highest risk of a dividend cut. So, if you want to own a diversified collection of stocks that increase their dividends regularly, Vanguard Dividend Appreciation could set you up for a lifetime of doing just that.
But is it the best exchange-traded fund for you? That's a different question.
How does Vanguard Dividend Appreciation ETF stack up?
For starters, Vanguard Dividend Appreciation's 1.8% dividend yield is higher than what you'd get from an S&P 500 (^GSPC -0.01%) ETF like Vanguard S&P 500 ETF (VOO 0.04%), which has a 1.3% or so yield. But 1.8% is hardly a large yield on an absolute basis. You could do better with Schwab U.S. Dividend Equity ETF (SCHD), which has a roughly 4% yield.
Data by YCharts.
Schwab U.S. Dividend Equity ETF also picks from the U.S. stocks that have increased dividends for 10 years. But it layers on a screening process that focuses on buying high-quality, growing businesses with attractive yields. It leans more toward yield than the Vanguard Dividend Appreciation ETF, making the Schwab U.S. Dividend Equity ETF a better choice if you are looking for income.
What about "appreciation," for those more interested in total return? Looking at Vanguard Dividend Appreciation ETF's total return versus the Vanguard S&P 500 ETF paints an ugly picture. As the chart below highlights, just buying the S&P 500 index would have resulted in a notable improvement in total return.
Data by YCharts.
All in, you can do better on the yield front than Vanguard Dividend Appreciation ETF with a more refined investment approach like the one offered by Schwab U.S. Dividend Equity ETF. And you can do better on the total return front with a simple S&P 500 tracking ETF. Since dividends and appreciation are the two main reasons to buy Vanguard Dividend Appreciation ETF, it doesn't come across as a compelling buy.
You can do better, but it isn't terrible
To be fair, Vanguard Dividend Appreciation ETF isn't a horrible ETF. It will likely continue to provide investors with a modest level of dividends and some capital appreciation over time. You probably wouldn't be making a huge mistake buying it if you like to focus on companies that regularly increase their dividends. However, if you are looking to maximize either income or capital appreciation, there are clearly better options out there.
