A Trusted Dividend ETF

May 10, 2016 9:48 am
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A Trusted Dividend ETF

Home to $20.6 billion in assets under management at the end of the first quarter, the Vanguard Dividend Appreciation ETF (NYSE: VIG) is the largest U.S. dividend exchange traded fund. There are reasons why VIG wears that crown.


Obviously, when a Vanguard ETF is being discussed, fees are often highlighted, in a good way. Pennsylvania-based Vanguard, the second-largest U.S. ETF issuer, brought its low-fee reputation from the world of index funds to ETFs. In VIG's case, the ETF charges 0.1 percent per year, or $10 for every $10,000 invested. Only one dividend ETF is less expensive when it comes to annual fees


VIG, which follows the NASDAQ US Dividend Achievers Index, has another perk for investors. Its underlying index only includes companies that have boosted payouts for at least 10 consecutive years. In the case of many of VIG's 186 holdings, such as Dow components Coca-Cola Co. (NYSE: KO) and Johnson & Johnson (NYSE: JNJ), the dividend increase streaks are significantly longer than a decade.


“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,” according to Morningstar


VIG has a trailing 12-month dividend yield of just under 2.2 percent. That is better than 10-year U.S. Treasurys, but only slightly higher than the 2.1 percent found on the S&P 500. To be fair, VIG does not position itself as a high dividend ETF as is highlighted by the ETF's combined weight of just three percent to the high-yielding utilities and telecom sectors. Further suppressing VIG's yield is the ETF's exclusion of real estate investment trusts (REITs).


VIG “tends to invest in higher-quality companies. The fund has a greater percentage of assets in stocks with Morningstar Economic Moat Ratings of wide (58% as of March 2016 to the S&P 500's 50%). In addition, its companies have higher returns on invested capital, returns on assets, and returns on equity than the S&P 500. These characteristics usually do not come cheap, and the fund’s holdings currently trade at slightly higher multiples of earnings and book value than the S&P 500,” adds Morningstar.


VIG's top 10 holdings combine for 31.6 percent of the ETF's weight while two sectors – industrials and consumer staples – combine for almost 46 percent.


Todd Shriber owns shares of JNJ.

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