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Home to nearly $64 billion in assets under management, the Vanguard Dividend Appreciation ETF (VIG) isn’t just the largest dividend exchange traded fund by assets. It’s in rarefied air among all ETFs.
Just 15 ETFs trading in the U.S. are bigger than VIG based on AUM. That’s comforting to investors, but there’s much more than heft underpinning the VIG story. For example, dividend growth – the very strategy this fund emphasizes – is back in style in a big way.
In the first quarter, “nearly every US company in the Index (99%) increased their payments or held them steady, as dividends continued to be a reliable source of income growth for shareholders,” according to a statement issued by Janus Henderson
“Globally, first quarter dividends jumped by 11% on a headline basis to a total of $302.5bn, also a record for the seasonally quieter first three months of the year. Underlying growth was even stronger at 16.1%. Janus Henderson’s analysis shows that dividends have more than doubled since 2009, when the Index launched,” adds the research firm.
VIG Often Durable
VIG, which tracks the S&P U.S. Dividend Growers Index, is attractive to advisors and clients for numerous reasons, including the Vanguard name. That index requires member firms to have dividend increase streaks of at least 10 years. On a related note, VIG keeps with the Vanguard tradition of low fees.
The dividend ETF charges just 0.06% per year, or $6 on a $10,000 investment. That compares with the category average of 0.80%, according to issuer data. As advisors know, low fees are meaningful to long-term clients. The more clients save on fund fees, the better long-term outcomes are.
“On top of the long lookback period, the index also excludes stocks with untenable yields that are likely to have trouble growing their dividends,” says Morningstar analyst Lan Anh Tran. “The index removes existing constituents ranking in the top 15% by indicated annual yield and new eligible securities in the top 25%. Selected constituents are weighted by their float-adjusted market cap, subject to a 4% cap on any individual holdings' weight.”
Translation: VIG isn’t a yield-chasing ETF. While there are certainly times when high dividend strategies work, including the current environment, the concept carries some risk. Notably, some companies with jaw-dropping dividend yields are burdened by those obligations and when times are tough – consider the 2020 coronavirus bear market – high yielders can turn into dividend offenders.
On the other hand, VIG has an over quality tilt and is lightly allocated to some of the sectors synonymous with large dividends. For example, utilities and energy stocks combine for just 3.4% of the fund’s weight. The ETF’s emphasis on quality and dividend durability is evident with a nearly 40% combined weight to the technology and healthcare sectors – two of the leading sources of reliable large-cap dividend growth in recent years.
More VIG Perks
The venerable VIS has other benefits of relevance to clients and some of those traits are amplified at a time when markets are saying junky companies aren’t in style.
“Thanks to this quality focus, the fund has enjoyed better profitability metrics than the Russell 1000 Index while maintaining a similar P/E ratio. This quality tilt has helped the fund protect shareholders during major crises, including the 2008 global financial crisis and 2020 coronavirus shock,” adds Morningstar’s Tran.
These days, the combination of reliable dividend growth and profitability is attractive and rewarding for clients. VIG has those goods.