Over the past three and a half years, the dominant U.S. equity themes have been tech, growth, semiconductors, and artificial intelligence (AI). Whether you look at performance or investment flows, it seems to be all anybody wants right now.
That means that a lot of themes that have traditionally worked quite well in the past are largely being ignored right now. One of those themes is dividend-paying stocks. Since the 1940s, dividends have accounted for about one-third of the S&P 500‘s (^GSPC +0.22%) total return. That’s very easy to overlook, since tech stocks have been driving returns and the S&P 500’s current yield of 1.05% is an all-time low.
But being overshadowed doesn’t suddenly make dividend investing a subpar strategy. Dividend growers in particular can still be substantial wealth builders over time. The Vanguard Dividend Appreciation ETF (VIG +0.33%), which happens to have a surprising growth component in its portfolio, is one of the better ways to accomplish this.
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Dividend growth as a long-term wealth-building strategy
Focusing one’s portfolio almost entirely on tech and growth stocks can unquestionably deliver extra returns. But over time, a portfolio like that usually features above-average volatility, deeper drawdowns, and longer recovery periods.
Plus, history shows that many people don’t ride out bear markets. They sell after stocks have fallen and only get back in once the recovery has happened. That makes more durable and defensive dividend stocks a potentially smoother path to long-term wealth creation.
That’s the biggest benefit of investing in long-term dividend growers. One study from Ned Davis Research covering more than 50 years of market return data found that dividend growers generated higher total returns with lower overall volatility than companies that pay but don’t grow dividends, non-dividend payers, and dividend cutters.
That type of finding tends to get lost in today’s growth-heavy market, but it clearly shows what these stocks can do in the longer term.
Why VIG may be the best “growth plus income” fund
The Vanguard Dividend Appreciation ETF targets large-cap stocks with 10 or more years of consecutive annual dividend growth.
Vanguard Dividend Appreciation ETF
Today’s Change
(0.33%) $0.77
Current Price
$234.65
Key Data Points
Day’s Range
$234.04 – $234.83
52wk Range
$196.55 – $234.83
Volume
955.1K
On the income front, that strategy helps ensure that shareholders see steady dividend increases from their investments. This ETF has increased its annual dividend for 12 straight years and has a 10-year dividend growth rate of about 7%. Its strategy does, however, eliminate the top 25% of dividend yields in order to help secure distribution stability. The ability to deliver consistent dividend growth is solid, but the 1.6% yield probably won’t get many people excited.
On the growth side, this fund currently benefits from the market cap-weighting methodology. That helps make Broadcom (AVGO +4.75%), Apple (AAPL 0.20%), and Microsoft (MSFT +5.25%) the fund’s top three holdings, with a combined weight of 13%. It also creates a 26% weighting in the tech sector as a whole. That gives the Vanguard Dividend Appreciation ETF a growth tilt that few dividend ETFs can match.
That’s why I believe this fund is one of the best combinations of growth and income in the marketplace. The yield isn’t particularly exciting, but the portfolio combines the long-term benefits of dividend growth investing with a tech overweight that helps it capture some extra upside in bull markets.
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