Is Vanguard’s Dividend Appreciation ETF A Buy, Sell, Or Hold? | VIG

The Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) is one of the most popular ETFs out there among both growth investors and dividend investors. It’s very tough for an ETF to be popular among those polar-opposite demographics, but there’s also a misunderstanding that has added to VIG’s popularity. We will get into that later.

All you need to do to understand VIG’s popularity is look at a long-term chart of this ETF’s performance. It’s a beautiful chart with minimal deviations from its long-term trajectory, a trajectory that is outperforming most dividend stocks massively while offering you dividend growth.

Well, how does it do all that?

How VIG gets you both “dividends” and market outperformance

VIG tracks the Nasdaq U.S. Dividend Achievers Select Index (formerly the Mergent Dividend Achievers Select Index). It is the largest dividend-focused ETF on the market.

The methodology for inclusion is 10+ consecutive years of annual dividend increases, minus the 25% highest-yield stocks to filter traps.

What this ends up doing is that it gets you access to companies that are cash-rich and are growing fast. These are the exact same companies that tend to hike their dividends significantly year after year. The growth investors who invest in VIG invest with that logic and have been proven right.

However, the investors who invest in VIG because of the dividends should know that the “dividend appreciation” label on this ETF is a misnomer.

There’s dividend appreciation, minus the compounding

You are getting a 1.5% dividend yield, but this yield is not going to grow like it would if you bought and held an individual dividend growth stock. The fund is constantly cycling out stocks the moment they mature into the slow-growth, high-yield phase that creates yield-on-cost wealth. It also ejects stocks the instant they have one bad year. You shouldn’t mistake VIG as a long-term vehicle for compounding your income.

For example, if you bought Microsoft (NASDAQ:MSFT | MSFT Price Prediction) today and held it for 30 years, you’d be sitting on a lot of MSFT shares, and its yield would likely rise to 4-5% or more by then. Congratulations, you have a solid income vehicle.

If you buy and hold VIG for 30 years, you’d still hold a growth ETF with yields likely hovering in the low single digits. Consistent 10% annual increases are rarely sustained for more than 5 to 10 years. So, once Microsoft starts to mature, it will be kicked out of the VIG and replaced with something that grows faster and gets you dividend growth.

This is mostly a growth ETF that has a unique way of capturing all the companies with good, healthy financials. Almost 26% of its holdings are in the tech sector, followed by 20% in the financial sector. The top 3 holdings are all tech.

I would not buy it if you want to compound your dividends over decades as your holdings get you higher and higher yields.

VIG is still a stellar ETF for safer growth lovers

VIG is among the more flawless ETFs in this market because the structure forces in companies with strong cash flow and growth and filters out those with weaknesses without doing so directly.

Management at companies will not hike dividends significantly if their financials are weak and they expect them to be weak going forward. Therefore, the holdings in VIG are, by and large, firms that are financially very strong and well-positioned to keep growing fast.

Moreover, I would argue VIG is among the safer growth ETFs out there due to its focus on dividend growth. When a company pays more in dividends, it needs to cover these dividends with its cash flow, and they need to maintain a healthy payout ratio to make those dividends attractive to investors.

Multiple Magnificent 7 companies are dumping free cash flow into the AI buildout with a long return on investment horizon. VIG eventually kicks out companies like these as they cannot keep growing their dividends while overinvesting in AI. This acts as a unique de-risking component that could shield it more from a possible future AI downturn.

All in all, I’ll buy and hold VIG and put this in a growth portfolio. If you are a retiree looking for dividends or you are looking to implement a multi-decade dividend compounding strategy, VIG is not it.