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Why Vanguard Dividend Appreciation ETF Is Attractive Today

This exchange-traded fund favors high-quality and financially sound dividend-growth stocks that can weather economic uncertainty.

Vanguard Dividend Appreciation ETF (VIG) takes a quality approach to equity income instead of chasing riskier high yields. Its profitable and established constituents should better insulate the portfolio from volatility. Its U.S. share classes earn Morningstar Analyst Ratings of Gold, while the Canadian exchange-traded fund is rated Silver.

The fund tracks the S&P U.S. Dividend Growers Index, which provides a market-cap-weighted portfolio of stocks with at least 10 consecutive years of increasing their regular dividend payments. Securities must have more than $100 million in market cap and $1 million in three-month median daily trading value to be eligible for additions. Existing constituents face lower thresholds to reduce turnover. On top of the long lookback period, the index also excludes stocks with untenable yields that are likely to have trouble growing their dividends. The index removes existing constituents ranking in the top 15% by indicated annual yield and new eligible securities in the top 25%. Selected constituents are weighted by their float-adjusted market cap, subject to a 4% cap on any individual holdings' weight.

Instead of chasing yield, the combination of a long lookback period and a yield screen ensures constituents are stable and profitable companies with a proven track record of dividend growth. This takes out household names such as Intel (INTC) or Apple (AAPL). The resulting portfolio allocates more assets to stocks with wide Morningstar Economic Moat Ratings—established industry leaders—than the Morningstar Category index. Thanks to this quality focus, the fund has enjoyed better profitability metrics than the Russell 1000 Index while maintaining a similar P/E ratio. This quality tilt has helped the fund protect shareholders during major crises, including the 2008 global financial crisis and 2020 coronavirus shock.

This approach will not serve up a sky-high yield like other dividend strategic-beta funds, and it might not provide enough income for certain groups of investors. However, this high-quality portfolio should perform well during downturns and provide an incremental dividend payout over its category peers.

Similar to most dividend strategies, the portfolio's dividend orientation shapes its sector tilts. The fund intentionally excludes REITs. Its dividend focus pushes it toward industrials and consumer staples while shaving down technology and energy exposure. Underweighting tech stocks has hurt performance, while avoiding the energy sector has helped in the past few years. But this might not always be the case.

Key Proprietary Morningstar Metrics

Morningstar Analyst Rating: Gold
Process Pillar: Above Average
People Pillar: Above Average
Parent Pillar: High

Lan Anh Tran does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.