Dividend growth or dividend appreciation is a powerful concept. With the right approach, your stock portfolio earns you more and more money every year. Among many dividend growth funds, Vanguard’s Dividend Growth ETF stands the biggest, VIG. In this article, I want to do a VIG review & deep dive into dividend growth funds in general. I will see if VIG is a good buy at today’s prices and whether VIG is a good investment in general. Figure out if these ETFs are worth the cost and if they should be a part of everybody’s portfolios.
About VIG and VIG Components
Vanguard needs no introduction. It is one of the oldest fund managers globally and the company that invented the index fund.
VIG is an ETF that tracks the performance of the S&P U.S. Dividend Growers Index.
The S&P U.S. Dividend Growers Index is designed to measure the performance of U.S. companies that have followed a policy of consistently increasing dividends every year for at least 10 consecutive years. The index excludes the top 25% highest-yielding eligible companies from the index.
Okay, so VIG gives us companies with at least ten years of consistent dividend increases. Let’s look at a few of these companies.
VIG Top 10 Holdings
The top ten holdings represent around 30% of the overall portfolio, so it is slightly top-heavy, but it is to be expected. Usual suspects and long-time dividend champions list J&J, P&G, Costco, Microsoft, etc.
Overall, VIG is very well diversified, with 268 total holdings and $78 billion under management.
Also, something to note is that the fund doesn’t have any foreign holdings.
VIG Dividend Growth Historical
The main goal with VIG is to see our dividend increasing over the years. So let’s see how well VIG has been growing its dividend over the last ten years.
That is a 184% increase over the ten-year period or almost 3x the dividend. In 2012 you could have bought VIG for around $58 and received $0.27 in dividends or roughly 2%.
$10,000 investment would generate $200 in income every year.
Holding the stock until today, you would be getting roughly $600 in income every year and sit on a 289% return.
2021 has been an excellent year for many of the dividend champions, and many of them followed with hefty dividend increases. 2021’s gain has been the most significant at almost 51%. Note that it is unlikely that the same growth rate will persist over the years.
VIG Total Return
VIG has returned just over 120% over the last five years.
Almost identical to that of the S&P500 ETF, SPY.
Although overall performance is similar to SPY, this is not the primary goal. VIG outshines SPY as it is supposed to do when it comes to dividend growth.
Dividend Growth Stocks and Inflation
Income growth has become crucial during periods of inflation. Investors are seeking high yield and looking for consistent income growth in the future to offset rising prices.
With inflation well above 6% and even more in some specific sectors, that is the rate of growth that dividend growth stocks will need to provide to keep up.
You can get a detailed breakdown of U.S inflation rate from the official source: https://www.bls.gov/cpi/
If you were to buy VIG now, you would receive just under a 2% dividend yield. It will take many years of dividend growth for the yield to grow to match inflation. So essentially, it will be a losing asset for many years to come if inflation persists.
So despite impressive dividend growth, the starting yield is too low to consider it a good investment for some.
VIG vs. VYM – Yield or Growth
When investing in dividend stocks, typically, we choose between growth and high yield today. What defines high-yield changes with the times greatly depends on the interest rate environment. Today anything above 4% would be considered high-yield.
VYM is Vanguard’s High Yield ETF.
Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
The problem is that with its rising price, the current yield of 2.76% is not high.
With the recent rise in price, the yield has significantly decreased.
Let’s compare that to the VIG’s dividend yield of 1.57%.
I can’t call 2.76% a high yield. Although it is higher than S&P’s, it is lower than inflation and what some of the dividend champions are paying these days.
Considering the two ETFs, the choice is an extra 1% of yield today vs. reliable dividend growth over the years. Just looking at dividend yield doesn’t paint the whole picture, so I want to run a more extensive analysis to consider volatility, expenses & allocations and also throw S&P500 in there. I will assume dividends are re-invested along the way for each of the ETFs.
VIG vs. VYM vs. SPY
Here is the return of a hypothetical $10,000 invested in these three ETFs in 2006. Over the twelve years until 2018, performance has been almost identical between the three. From 2018 until the end of 2021, VIG and SPY outperformed high-yielding VYM.
The difference in fees between the three is negligible.
Standard deviation, a popular measure for volatility, is slightly lower for VIG compared to VYM and SPY. It is not significantly lower for VIG, especially for portfolios with bonds as part of their composition like the All Weather Portfolio.
Purely looking at historical return profile, expenses, and annualized volatility, there is little difference between VIG and SPY.
✅ VIG Pros
Despite the negatives I mentioned, VIG has quite a few Pros.
❌ VIG Cons
Is VIG a good buy right now?
That is a more complex question, but I like to quickly look at analyst expectations for the Top Ten Holdings. Usual disclaimer, Wall Street analysts are wrong at least as many times as they are right so take the following ratings with a grain of salt. However, it still should indicate how the market is feeling about the top ten holdings in general.
Here is the summary:
It looks like, at least for the 30% of VIG, the market remains Bullish at current prices.
In conclusion, if you are looking for dividend growth and are okay with the low yield at the start, VIG might be a good choice. However, generic S&P500 ETF SPY will likely deliver similar results for the foreseeable future and perform well during inevitable market downturns.