S&P Bullish On Vanguard Dividend Appreciation ETF (VIG, PEP, PG)

Home to 134 stocks, VIG had $10.9 billion in assets under management at the end of May, according to data from the ETF Industry Association. VIG's 0.13% expense ratio makes it cheaper than 88% of comparable funds, Vanguard says on its website.

The ETF tracks the Dividend Achievers Select Index, which offers exposure to companies that have boosted their payouts for at least 10 straight years.

"The Dividend Achievers are typically companies with strong cash reserves, solid balance sheets and a proven record of consistent earnings growth, in our view," S&P said in the note.

Despite the focus on dividend growth, VIG only yields 2%: the same as the SPDR S&P 500, although it should be noted that VIG has a lower beta than the S&P 500 at 0.81. S&P Capital IQ highlights why VIG's low yield is tolerable below:

"We believe that this is because many of the stocks in the S&P 500 that have relatively high dividend yields also have somewhat weak financial positions and lack a long track record of dividend increases, and therefore would not be included in this ETF. Nevertheless, VIG focuses on companies that deliver dividend growth, and on that measure the fund has a solid track record, in our view. From its first full year of paying dividends in 2007 through its most recent full year in 2011, the fund has shown a compound annual growth rate in dividends of 7.6%," S&P said.

Consumer staples and industrial names combine for almost 46% of VIG's sector weight. At 15.3% and 10.2%, respectively, consumer discretionary and energy are the only other sectors to receive double-digit allocations in the ETF.

VIG's top-10 holdings include nine members of the Dow Jones Industrial Average with PepsiCo PEP, VIG's, third-largest holding, being the outlier. Other top-10 holdings include Coca-Cola KO, International Business Machines IBM, Procter & Gamble PG, and 3M MMM.

VIG also features a 2.2% weight to Target TGT - the largest allocation of any dividend ETF. On Wednesday, Minnesota-based Target announced that it will increase its quarterly dividend by 20%.

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