Market Overview

A Vanguard Dividend ETF To Lean On

A Vanguard Dividend ETF To Lean On

With Treasury yields rising, some dividend strategies are being pressured. Bond-like sectors — such as real estate, telecommunications and utilities — are lagging broader equity benchmarks this year.

That does not mean investors should abandon dividend stocks and exchange traded funds altogether. Some dividend funds can weather the storm of rising interest rates. While it is not setting the world on fire, the Vanguard Dividend Appreciation ETF (NYSE: VIG), is up 1 percent this year.

What Happened

VIG follows the NASDAQ US Dividend Achievers Select Index, which requires that member firms have dividend increases spanning at least 10 years. The Vanguard fund had over $27 billion in assets under management at the end of April, making it the largest dividend ETF trading in the U.S.

VIG has long been a favorite with dividend investors due in part to its low fee. The fund's annual expense ratio is just 0.08 percent, or $8 on a $10,000 investment, making it less expensive than 92 percent of rival strategies, according to Vanguard data.

“Focusing on dividend growth reduces the fund's exposure to firms that have weak fundamentals and may not be able to sustain their dividend payments, which is a risk that often accompanies a narrow focus on yield,” Morningstar said in a Wednesday note.

Why It's Important

VIG is a large-cap strategy, as highlighted by the median market value of $65.9 billion for the ETF's 182 holdings. What's notable is VIG's lack of exposure to high-yield sectors. The fund features no real estate exposure, and the telecommunications and utilities sectors combine for just over 3 percent of VIG's roster.

“This portfolio favors profitable companies with durable competitive advantages,” according to Morningstar. “Because it doesn't pursue the highest-yielding names, its dividend yield lands near the Russell 1000 Index's. But it has been able to avoid some firms that have cut their dividend payments.”

What's Next

VIG has the potential to remain durable even as the Federal Reserve continues its tightening cycle. The fund's sector-level positioning tilts toward cyclical groups, with industrial and consumer discretionary names combining for over half of its weight.

VIG's “tilt toward profitable names is evident in its portfolio composition," according to Morningstar. "As of this writing, the fund's return on invested capital measured 14.3 percent compared with an average measure of 9.9 percent for the Morningstar Category." 

The research firm has a Gold rating on VIG.

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