Dividend exchange-traded funds (ETFs) haven't exactly been in favor for a while. With tech and artificial intelligence (AI) stocks producing market-leading returns over the past three years, investors haven't paid much attention to defensive dividend stocks paying 2% to 3% yields.
2026 could provide a change of pace. Stocks have rallied almost without interruption for some time, but there are some cracks developing under the surface. The Vanguard Dividend Appreciation ETF (VIG 0.24%) could be one of those investments that has the potential to perform well regardless of which way the economy is headed.
What is the Vanguard Dividend Appreciation ETF (VIG)?
VIG is a straightforward dividend growth fund. It targets U.S. stocks that have increased their dividend payments for the past 10 years, while excluding the top 25% highest-yielding companies. The final portfolio is market-cap weighted.
This strategy accomplishes a few things:
- The 10-year requirement is a relatively looser criterion than you'll find in other dividend ETFs, which require, for example, a 25-year dividend growth history. This allows for the inclusion of newer dividend growers, such as Apple, Microsoft, and Broadcom. This gives VIG more tech exposure than many of its dividend ETF peers.
- The elimination of the top 25% yielding stocks helps avoid potential yield traps.
- VIG's market cap-weighting methodology means that the portfolio's mega-cap tech holdings get larger allocations. That could be a good thing if you're a tech bull.
While VIG's strategy at a high level is relatively conservative, the fact that it results in three mega-cap tech names controlling 16% of the fund's assets actually makes it more aggressive.
NYSEMKT: VIG
Key Data Points
Let's take a look at some of the main factors that will affect the Vanguard Dividend Appreciation ETF in 2026.
VIG's strategy helps it overweight tech stocks
If you're a believer in the "Magnificent Seven" stocks (or tech in general) and think that they have more upside ahead, VIG is probably a pretty good bet among dividend ETFs.
More than 28% of VIG's portfolio is currently invested in tech stocks. That's largely due to its market cap-weighting strategy, which assigns heavier weightings to the largest qualifying companies, regardless of their dividend profile.
Barring a significant bear market in the mega-cap tech companies, this heavy tech presence is likely to continue. The accelerated growth in earnings and revenue we've seen in recent quarters from the biggest names could boost VIG in 2026.
Dividend growth assists if inflation is sticky
The most recent inflation reading in the United States came in at 3% annualized, and it's been trending higher for several months.
The inflation problem remains unsolved. That could be a headwind for riskier equities in 2026.
This is, however, the environment where dividend growth stocks can prove helpful. The yield component can help offset inflation pressures, while the defensive nature of the portfolio could help mitigate some downside risk should equities come under pressure.
Quality tilt benefits in an uncertain environment
High-quality stocks that feature strong balance sheets and healthy cash flows are never a bad thing to own, regardless of the environment. But with the labor market slowing and questions about consumers' ability to keep spending, a shift away from riskier stocks may be in order.
Long-term dividend growers tend to feature the financial strength that makes them more durable if conditions start deteriorating. As the market broadens beyond just narrow tech leadership, quality could play a larger role in future returns.
VIG is designed to avoid yield traps
The Vanguard Dividend Appreciation ETF isn't a high yielder, but that's by design. The elimination of the top 25% highest-yielding stocks right off the bat demonstrates that the fund is focused strictly on dividend growth, not reaching to maximize income.
High yields can sometimes be due to falling share prices or may signal a high risk of a forthcoming dividend cut. Staying away from high yields won't eliminate that risk altogether, but it should mitigate a lot of it. That's a positive for investors focused on consistent and predictable dividend growth.
Investors haven't been very interested in dividend stocks for a while. Not when large-cap stocks are delivering annual returns or 20% or more. Conditions are shifting, though, and that shift could benefit previously unloved dividend payers.
VIG's strategy, which focuses on company quality and disciplined dividend growth, could prove fruitful in 2026 as the economic backdrop continues to moderate.
