Vanguard has made it easy for anyone to be a passive investor. It has several passively managed exchange-traded funds (ETFs) designed to track a specific stock market index. That enables investors to buy funds with strategies that align with their objectives.
Investing in dividend growth stocks is one of the smartest strategies because they've historically produced the highest total returns with the lowest volatility. That makes the Vanguard Dividend Appreciation ETF(NYSEMKT: VIG), which tracks the performance of the S&P U.S. Dividend Growers Index, a brilliant ETF to buy. It could significantly grow the value of a $1,000 investment made this June.
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Appreciating the power of dividend growers
Most investors don't fully appreciate the power of dividend payments. Since 1940, dividend income has contributed 34% of the S&P 500's total return on average, according to data by Morningstar and Hartford Funds. Further, Hartford Funds and Ned Davis Research have found that since 1973, the average dividend payer in the S&P 500 has delivered a 9.2% average annual total return, more than double the return of non-dividend payers (4.3%). Dividend payers also had much lower volatility than non-dividend payers.
In digging deeper into the data on dividends, Hartford Funds and Ned Davis Research uncovered that the best returns and lowest volatility came from dividend growers and initiators. They delivered an average total return of 10.2% compared to 6.8% for companies with no change in their dividend policy and a negative 0.9% average return for dividend cutters and eliminators.
Given that data, investing in dividend growth stocks is a brilliant strategy. However, that's easier said than done for the average investor who doesn't have the time to actively manage a portfolio of dividend stocks.
That's where Vanguard can help. The Vanguard Dividend Appreciation ETF tracks an index that screens companies for those with a consistent record of increasing their dividends for at least the past decade. It excludes the top 25% highest-yielding dividend stocks from the list because these companies tend to be at higher risk of being unable to grow their dividends (or worse, cut or eliminate their payouts), which has historically yielded lower investment returns. There are currently 338 stocks on the list.
Built for growing value
The Vanguard Dividend Appreciation ETF isn't a typical dividend ETF. Many of those funds focus on holding higher-yielding dividend stocks and cater more to income-focused investors. This fund aims to benefit from the value growth that dividend growth stocks have historically delivered. That's why its dividend yield (recently around 1.7%) is lower than many other top dividend ETFs.
However, what this ETF lacks in yield, it more than makes up for in total return. Over the past 10 years, the fund has delivered an 11.5% average annual return. At that rate, it would have grown a $1,000 investment made a decade ago into nearly $3,000. That's a great return for a lower-risk investment strategy.
While the fund's past performance doesn't guarantee it will produce similar returns in the future, its focus on dividend growers puts it in a strong position to meaningfully increase the value of an investment over the long term. For example, if it can deliver a 10% annual return, it could grow a $1,000 investment into nearly $17,500 in 30 years. Meanwhile, if it maintained its rate of return over the past decade (11.5%), it could grow $1,000 into over $26,000 in 30 years.
The more you invest in the fund, the more money you can potentially make in the future. Adding $1,000 to your investment in this ETF each year could grow the total value to nearly a quarter of a million dollars in 30 years at an 11.5% annual rate of return.
A smart Vanguard ETF to buy
Dividend growth stocks have historically been powerful investments for those seeking to grow their wealth over time. They produce strong returns with less volatility than non-dividend payers and other dividend stocks. Because of that, the Vanguard Dividend Appreciation ETF looks like a brilliant ETF to invest $1,000 into this June. It could grow that money into a much larger future windfall.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
