May 7, 2016

A Defensive, Low-Cost Dividend Growth ETF

This dividend strategy has shone during market downturns by favoring companies with durable competitive advantages. 



Vanguard Dividend Appreciation ETF (VIG) has several merits. The fund is backed by Vanguard's massive indexing operation, which is topnotch in the industry. Like most Vanguard funds, it benefits from low fees. With an expense ratio of 0.10%, this exchange-traded fund is priced competitively relative to other strategic-beta offerings, which are typically a little pricier than standard index funds.

The fund tracks the Nasdaq U.S. Dividend Achievers Select Index, which includes stocks that have increased their dividend for at least 10 consecutive years but excludes REITs and other companies that have low potential for dividend growth. Unsurprisingly, the fund has seen a drop in its energy exposure as oil prices have slid, from almost 10% of assets in March 2014 to 1% in March 2016. 

The fund's focus on firms that are financially healthy enough to grow their payouts favors highly profitable companies with durable competitive advantages. Relative to the S&P 500, the fund sports higher returns on equity, assets, and invested capital. Those traits can come at a premium, and the fund does look pricier than the S&P 500 on traditional metrics such as price/earnings and price/book as of April 2016...

Source: Morningstar