VIG Is a Popular Dividend ETF for Passive Income. But Is It the Best?

Key Points

• With a 1.8% yield, the Vanguard Dividend Appreciation ETF isn't the highest-paying dividend ETF.

• Instead of focusing on stocks with high yields, it focuses on those with extended track records of dividend increases.

• It could be a great ETF for investors who are more concerned with building their future income streams.

• 10 stocks we like better than Vanguard Dividend Appreciation ETF ›

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The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG), also commonly referred to simply by its ticker symbol, VIG, is an index fund that holds a portfolio of more than 330 dividend-paying stocks. But with dozens of excellent exchange-traded funds (ETFs) focused on dividend stocks to choose from, is this one the right fit for you?

Let's take a closer look at the Vanguard Dividend Appreciation ETF and which types of investors it could be the best dividend stock ETF for.

What is the VIG?

The Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers index, which includes only stocks with established track records of raising their dividends every year. Unlike some of the other dividend-focused ETFs offered by Vanguard, stocks don't necessarily need to have above-average dividend yields to be included -- just a dividend growth streak of at least 10 straight years.

In part for this reason, the ETF has a 1.8% yield. That's more than you'd get from an S&P 500 index fund, but it isn't close to what most "high dividend" ETFs offer.

However, it's important to realize that this ETF isn't about creating a large stream of income immediately. In fact, the index that it tracks excludes the highest-yielding 25% of stocks that would otherwise meet its criteria. Though that might seem counterintuitive, there's a logical reason why: Often, a particularly high dividend yield is the result of a plunging stock price. Given that many noteworthy stock declines are triggered by bad news for the underlying business, and that such troubles can make it harder for a company to pay and raise dividends, foregoing the highest-yielding options in the near term can be a smart strategy for achieving reliable payout growth over the long term.

The idea is that this fund holds stocks that will be paying significantly more in dividends 10 years from now, 20 years from now, and so on.

Like most Vanguard ETFs, the Dividend Appreciation ETF is a low-cost investment vehicle. It has a rock-bottom 0.05% expense ratio, which means that for every $10,000 in invested assets, your annual fee expense will be just $5. (To be clear, this isn't a fee you have to pay -- it will simply be reflected in the fund's performance over time.)

What does the VIG ETF invest in?

As of the latest update, the Vanguard Dividend Appreciation ETF owned 337 stocks, and it's a weighted index, so some stocks make up significantly more of the portfolio than others. Top holdings include Broadcom, Microsoft, Apple, Eli Lilly, and JPMorgan Chase.

One of the most interesting features of this ETF is that because it doesn't require above-average dividend yields, it includes a lot of high-growth companies that many dividend ETFs exclude. For example, Broadcom -- the largest holding in the fund -- has a dividend yield of just 1% at its current share price. However, that tech company has grown its payouts at a double-digit percentage pace and has increased them for 14 consecutive years. Because it has more growth stock exposure than most dividend ETFs, the Vanguard Dividend Appreciation ETF has the potential to deliver stronger total returns.

Is VIG the best dividend ETF for you?

There's no such thing as an ideal dividend ETF for everyone -- that's why there are dozens of them to choose from. The Vanguard Dividend Appreciation ETF could be an especially great choice for investors who want dividend income in their portfolios but are more concerned with how much they'll be getting paid in the future than the current yields of their stocks.

In a nutshell, if you're 70 years old and relying on your portfolio for income today, or if you're preparing to retire within the next few years, the Vanguard Dividend Appreciation ETF might not be a great fit for you. On the other hand, if you're still a decade or more away from retirement, it could be an excellent ETF to help you build an income stream for the future without sacrificing growth potential.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

VIG Is a Popular Dividend ETF for Passive Income. But Is It the Best? was originally published by The Motley Fool