Learning to Appreciate Dividends

Most investors like the idea of receiving a rising dividend. The virtual guarantee of collecting a higher nominal return each year is intrinsically appealing, and companies that boost their dividends regularly can cultivate a clientele of investors who appreciate the income in return for deploying their capital with a proven performer. Even though an individual company can reduce or eliminate its dividend, an exchange-traded fund (ETF) such as Vanguard Dividend Appreciation ETF (VIG) limits that risk by diversifying its holdings among many dividend-paying companies.

This ETF tracks an index of U.S. companies that have a history of raising their dividends on a yearly basis. In order to be included in the index, a company must have raised its dividend for at least 10 years straight to prove its reliability as a dividend payer. Even if one company in the index fails to increase its dividend in a given year, this is not as significant as it would be if VIG investors instead owned just one company.

This fund has increased in value by 6.37% in the last 12 months. Given market turmoil and the tendency of dividend payers to be more stable, this is about in line with what we might expect of a solid investment. Dividend yield for this fund sits at 2.14%, and its expense ratio is a paltry 0.10%.

The sectors where VIG holds its highest concentration of investments are consumer defensive, 25.11%; industrials, 23.04%; and healthcare, 14.74%. The 10 largest positions in this portfolio total 34.56% of its assets. The biggest holdings among these are Wal-Mart Stores, Inc. (WMT), 3.99%; Johnson & Johnson (JNJ), 3.99%; Procter & Gamble Co. (PG), 3.91%; Coca-Cola Co. (KO), 3.81%; and Microsoft Co. (MSFT), 3.77%.

Given VIG’s $20.6 billion in assets managed, it’s clear that many investors feel this fund’s model is appealing. If you want to join this crowd, consider allocating funds to Vanguard Dividend Appreciation ETF (VIG).

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

In case you missed it, I encourage you to read my e-letter column from last week about a bond ETF. I also invite you to comment in the space provided below.