Dividend ETFs are among the best investments you can have in your portfolio. They might not be as exciting as tech or AI stocks, but owning companies backed by significant revenue, strong cash flows, and a desire to reward investors simply for being shareholders is almost always a smart choice.
If you have $500 to invest right now, whether you're starting out for the first time or looking to add to an existing portfolio, there's one dividend ETF in particular that, in my opinion, makes a lot of sense -- the Vanguard Dividend Appreciation ETF (VIG 1.31%).
It might be easy to get turned off by its relatively paltry 1.6% dividend yield, but let's run down the case for why it may still be the best place to put your money right now.
Image source: Getty Images.
What is the Vanguard Dividend Appreciation ETF?
The Vanguard Dividend Appreciation ETF tracks the Nasdaq U.S. Dividend Achievers Select Index. After some basic liquidity screens, it targets stocks with a minimum 10-year track record of increasing their annual dividend. It also excludes the top 25% highest-yielding companies based on indicated annual dividend yield from the final portfolio. Individual holding weights are capped at 4%.
This strategy comes with benefits and drawbacks.
On the downside, the elimination of the highest yields from the portfolio creates a clear drag on the fund's overall yield. This ETF can belong as part of a broader portfolio, but it rarely makes sense to use it as the sole dividend yield generator.
On the plus side, the 10-year dividend increase requirement is looser than you see in many other dividend growth ETFs. That means you get many more "emerging" dividend payers, specifically those from the tech sector, that don't typically qualify for similar funds.
Because the fund weights qualifying components by market capitalization, the fund's top three holdings right now are Broadcom, Microsoft, and Apple. This is despite all of them yielding less than 1%. Tech as a whole accounts for roughly 28% of the portfolio overall.
I see this is a potential flaw in the methodology, but one that positions the portfolio favorably for the current environment. That makes it an ETF worth considering.
NYSEMKT: VIG
Key Data Points
Why right now for this ETF?
The Dividend Appreciation ETF has benefited mightily from its tech overweight. Having two of the "Magnificent Seven" names in your top three (and Broadcom is ostensibly right on the fringes as well) has made it an above-average performer within the U.S. dividend ETF category over the past several years.
Based on current conditions, it could be in the sweet spot of growth plus income. The U.S. economy is still expanding. Inflation is relatively contained. The unemployment rate is still between 4%-5%. Interest rates are expected to trend lower in 2026. All of those factors should work in favor of growth stocks in the near to intermediate term. Since this ETF is overweight growth and tech relative to the rest of the dividend ETF category, it could be positioned well for above-average returns.
But it's got that defensive component as well. Requiring a 10-year dividend growth history means you're also investing in more durable, mature, and defensive-oriented companies. In a market downturn, that should help provide some downside protection. In essence, you may be getting the best of both worlds.
But the growth tilt is what makes it look more advantageous for the current environment.
A few risks to keep in mind
If you're considering the Vanguard Dividend Appreciation ETF right now, here are a couple of things to remember:
- The tech overweight that has helped the fund over the past few years could work against it in the future. Even though conditions look favorable now, any slowdown in growth or spike in inflation or unemployment may hit this portfolio harder than others.
- The 1.6% yield isn't particularly attractive. You'll probably need to augment it with another higher-yielding ETF.
Overall, if you believe the bull market in stocks will continue and the AI trade still has life in it, this ETF is probably positioned as well as any dividend ETF to capitalize.
As a starter ETF, the 0.05% expense ratio and focus on quality dividend-paying companies make a logical first investment. Even for seasoned investors, it's one worth considering.
