The technology sector has crushed the S&P 500 over the past three, five, and 10 years as leading tech stocks like Apple, Nvidia, Microsoft, and Broadcom have grown in value.
Investors gravitate mainly toward these stocks because of their growth potential, not their dividend yields. But what if there were an exchange-traded fund (ETF) that contained a sizable amount of tech stocks while also sporting a dividend yield higher than the S&P 500?
Investment giant Vanguard Group offers just that with its low-cost Vanguard Dividend Appreciation ETF (NYSEMKT: VIG). Here's how the fund balances growth and income and why you may want to consider buying it now.
Image source: Getty Images.
Prioritizing earnings and dividend growth
With over 330 holdings and a mere 0.06% expense ratio, or $6 for every $10,000 invested, the fund is an inexpensive way to achieve diversification. The Vanguard Dividend Appreciation ETF has a price-to-earnings (P/E) ratio of about 25 and a dividend yield of 1.7% compared to a P/E of 27 and a 1.2% yield for the Vanguard S&P 500 ETF. So right off the bat, the fund stands out as being more value- and income-oriented than the index.
But unlike other low-cost ETFs that achieve a higher yield by targeting safe and stodgy low-growth companies, the Dividend Appreciation ETF is chock-full of top-tier growth stocks. Apple, Microsoft, and Broadcom are five of the largest holdings in the fund. But so are JPMorgan Chase and UnitedHealth Group.
Instead of prioritizing stocks with high yields, the Dividend Appreciation ETF focuses on companies that are growing their earnings and, in turn, their dividends. For many companies in the ETF, the dividend isn't the main aspect of the investment thesis, but rather an added incentive to hold the stock over the long term.
Emphasizing a handful of sectors
Over 83% of the ETF is invested in just five sectors -- technology, financials, healthcare, industrials, and consumer staples. While the businesses that make up these sectors have little in common in terms of their day-to-day operations, many industry leaders use dividends as a way to pass along profits to shareholders.
Apple and Microsoft -- two of the highest-weighted tech stocks in the fund -- have 13 years and 15 years, respectively, of consecutive dividend raises. Meanwhile, Broadcom, another top-weighted tech stock, has boosted its dividend by over 80% in the last five years.
Diversified banks JPMorgan and Bank of America and payment processors Visa and Mastercard have raised their dividends every year for at least 10 years. Given its cyclicality, the financial sector tends to sport a relatively inexpensive valuation and includes many excellent value and dividend stocks.
Industrials is yet another cyclical sector that includes many companies with track records for raising their dividends. Caterpillar, Honeywell International, Union Pacific, and Lockheed Martin are some of the heaviest-weighted industrial stocks in the ETF. All four companies are similar in that they feature P/E ratios lower than the S&P 500 and yields higher than the S&P 500. It's companies like these that help keep a lid on the valuation of the Dividend Appreciation ETF.
Healthcare and consumer staples make up a combined 26% of the fund. Leading companies in these sectors -- like UnitedHealth, Costco Wholesale, Procter & Gamble, Walmart, Johnson & Johnson, AbbVie, Merck, and Coca-Cola -- tend to be relatively resistant to economic cycles, making them perfect candidates for raising their dividends no matter what the broader market is doing.
A plug-and-play investment tool to consider now
The Vanguard Dividend Appreciation ETF is a good fit for investors looking for a balanced portfolio of quality businesses with a runway for earnings and dividend growth. It is a good alternative to the Vanguard S&P 500 ETF if you're looking to avoid companies that don't pay dividends. Due to its structure, the fund weeds out high-flying, unprofitable growth stocks or companies that lack consistent earnings growth.
Add it all up, and the Vanguard Dividend Appreciation ETF provides a marvelously simple and passive way to put new capital to work in the stock market.
Should you invest $1,000 in Vanguard Dividend Appreciation ETF right now?
Before you buy stock in Vanguard Dividend Appreciation ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Dividend Appreciation ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $818,587!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Daniel Foelber has positions in Caterpillar. The Motley Fool has positions in and recommends AbbVie, Apple, Bank of America, Costco Wholesale, JPMorgan Chase, Mastercard, Merck, Microsoft, Nvidia, Union Pacific, Vanguard Dividend Appreciation ETF, Vanguard S&P 500 ETF, Visa, and Walmart. The Motley Fool recommends Broadcom, Johnson & Johnson, Lockheed Martin, and UnitedHealth Group and recommends the following options: long January 2025 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short January 2025 $380 calls on Mastercard, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
