It's hard not to love dividends. It's probably as close to free money as you'll get. The only thing you need to do to earn dividends is own the stock that pays them.
But sometimes people get the wrong idea -- that dividend stocks are ultra-conservative investments, suitable for retirees or those only looking for passive income. Nope, dividend-paying companies can also deliver price appreciation, especially companies that continually increase their dividends.
Fortunately, you don't need to find these stocks yourself. Instead, consider an exchange-traded fund (ETF) like the Vanguard Dividend Appreciation ETF (VIG 1.13%), which currently yields over 1.6% and has delivered total annualized returns of 12% for the past decade.
But is the ETF a buy right now, at a time when the broader stock market is at all-time highs? Here is what you need to know.
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Breaking down precisely what is in the Vanguard Dividend Appreciation ETF
An ETF is simply a bucket of individual stocks trading under one ticker symbol. The Vanguard Dividend Appreciation ETF comprises 337 stocks, so when you own a share, you're becoming a part owner in hundreds of individual companies. The primary benefit of an ETF such as this one is that you're instantly diversified, so you're not putting too many eggs in too few baskets.
The Vanguard Dividend Appreciation ETF is incredibly well-rounded, both by market sector and the companies within it. For instance, five sectors have double-digit representation in the ETF:
| Market Sector | Vanguard Dividend Appreciation ETF Weighting |
|---|---|
| Information technology | 26.6% |
| Financials | 22.5% |
| Healthcare | 14.6% |
| Industrials | 11.6% |
| Consumer staples | 10.1% |
Source: Vanguard; chart by author.
Some of the world's largest companies are technology and financial businesses, and happen to pay and raise dividends, so it makes sense that these sectors would carry a higher representation than others. To add some color to this, here are the ETF's top 10 individual holdings:
| Company | Vanguard Dividend Appreciation ETF Weighting |
|---|---|
| Broadcom | 6.01% |
| Microsoft | 5.20% |
| JPMorgan Chase | 4.07% |
| Apple | 3.42% |
| Eli Lilly | 2.85% |
| Visa | 2.70% |
| ExxonMobil | 2.38% |
| Mastercard | 2.27% |
| Walmart | 2.08% |
| Costco Wholesale | 2.04% |
Source: Vanguard; chart by author.
This top 10 represents a combined 33% of the fund, so they undoubtedly move the needle, but not so much that they alone can collapse the ETF if something happens to one of them. Among this list are top-notch stocks in artificial intelligence (AI), cloud computing, weight-loss drugs, and e-commerce. These dividend stocks are anything but boring.
A well-rounded composition may benefit the ETF if the "Magnificent Seven" stumbles
The Vanguard Dividend Appreciation ETF is a bit more well-rounded than the S&P 500 index, which carries hefty exposure to the "Magnificent Seven" stocks.
According to research by The Motley Fool, these stocks currently represent 34% of the index, up from just 12.3% a decade ago. As excited as investors are about AI and how it could affect the world over the coming decade and beyond, the increasingly higher weighting in the broader stock market creates concentration risks that investors shouldn't ignore.
Unfortunately, it's hard to get around this heavy representation, because these companies are going to show up in many market indexes and investment funds due to their massive multitrillion-dollar valuations.
However, the Vanguard Dividend Appreciation ETF includes only two Magnificent Seven stocks, Microsoft and Apple. In other words, the ETF is a great way to diversify your portfolio since you probably already have plenty of exposure to the Magnificent Seven companies, either directly or through other funds.
Should you invest in the Vanguard Dividend Appreciation ETF now?
The Vanguard Dividend Appreciation ETF primarily contains large-cap companies, so it's unlikely the ETF would be a bargain while the broader market is doing so well.
But that doesn't mean it's not a buy. The ETF's blended five-year annualized earnings growth rate is 12.8%, and it trades at a blended price-to-earnings ratio of 25.1. Using the price/earnings-to-growth ratio (PEG) to weigh the ETF's valuation against its earnings growth, the current ratio, about 2.0, is reasonable enough for long-term investors here, assuming the companies within the ETF continue to sustain that growth.
The value isn't compelling, so I probably wouldn't want to chase the ETF much higher from these prices. Still, it's never a bad idea to buy quality companies at reasonable prices, and these dividend-raising blue chip companies certainly earn that quality distinction. Consider nibbling on the ETF here, while saving some cash in case broader market volatility creates some better buying opportunities in the future.
