Vanguard Dividend Appreciation ETF (NYSEARCA:wig | vig price prediction) It is one of the most popular ETFs among both growth investors and dividend investors. It’s very difficult for an ETF to become popular among those polar-opposite demographics, but there is also a misconception that has added to the popularity of VIG. We will discuss that later.
To understand the popularity of VIG, you just have to look at the long-term chart of this ETF’s performance. This is a beautiful chart with minimal deviation from its long-term trajectory, a trajectory that is outperforming most dividend stocks while offering you dividend growth.
Well, how does it do all this?
How VIG gives you both “dividends” and market performance
VIG tracks the Nasdaq US Dividend Achievers Select Index (formerly Mergent Dividend Achievers Select Index). It is the largest dividend-focused ETF on the market.
The inclusion methodology is 10+ consecutive years of annual dividend growth, subtracting the 25% highest-yielding stocks to filter the net.
The result is that it gives you access to companies that are rich in cash and growing rapidly. these are perfect The same companies that significantly increase their dividends year after year. Growth investors investing in VIG invest with that logic and have been proven correct.
However, investors who invest in VIG because of its dividend should be aware that the “dividend appreciation” label on this ETF is a misnomer.
Dividends have increased, compounding has decreased
You’re getting a 1.5% dividend yield, but that yield is not going to grow like it would if you bought and held individual dividend growth stocks. The fund continues to pull out stocks as it matures into a slow-growth, high-yield stage that creates cost-at-cost wealth. As soon as they have a bad year, it delists the stock immediately. You should not make the mistake of considering VIG as a long-term means of increasing your income.
For example, if you purchased Microsoft (nasdaq:msft) Today and hold it for 30 years, you’d be sitting on a lot of MSFT shares, and by then its yield would likely rise to 4-5% or more. Congratulations, you have a solid income stream.
If you buy VIG and hold for 30 years, you’ll still have a growth ETF whose yields are likely to be in the low single digits. Consistent 10% annual growth is rarely sustained for more than 5 to 10 years. So, once Microsoft starts to mature, it will be phased out of VIG and replaced with something that grows faster and provides you with dividend growth.
It is mostly a growth ETF that has a unique way of capturing all the companies with good, healthy financials. About 26% of its stake is in the technology sector, followed by 20% in the financial sector. The top 3 holdings are all tech.
I wouldn’t buy it if you want to grow your dividends for decades as your holdings get you greater yields.
VIG is still a great ETF for safe growth lovers
VIG is one of the more flawed ETFs in this market because the structure forces companies with strong cash flow and growth out and filters out companies with weaknesses without having to do so directly.
If companies’ financials are weak, management will not increase dividends significantly and expect them to remain weak going forward. Therefore, the stake in VIG overall consists of companies that are very strong financially and well-positioned to grow rapidly.
Additionally, I would argue that VIG is one of the safer growth ETFs due to its focus on dividend growth. When a company pays out more in dividends, it needs to cover these dividends with its cash flow, and it needs to maintain a healthy payout ratio to make those dividends attractive to investors.
Multiple Magnificent 7 companies are pouring free cash flow into AI buildouts with long returns over the investment horizon. VIG ultimately excludes such companies because they cannot continue to grow their dividends while investing heavily in AI. This acts as a unique de-risking factor that may protect it from potential future AI meltdowns.
Overall, I would buy and hold VIG and put it in a growth portfolio. If you’re a retiree looking for dividends or you’re looking to implement a multi-decade dividend compounding strategy, VIG is not the one.