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2 Vanguard ETFs To Power Your Global Dividend Growth

This pair from the ETF heavyweight offers ultra-low cost exposure to long-term dividend growers with a simple, yet proven strategy.
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Investors desirous of creating an ever-growing income stream rightly look to dividend growth stocks as a core component of their investment portfolio. Some prefer to do so by carefully selecting individual stocks. Others, however, are intrigued by the simplicity and diversification made possible by any one of a number of quality dividend-growth ETFs.

In this article, I will feature two ETFs from Vanguard that are certainly worthy of your consideration. We’ll get into the specific ETFs in just a bit. But first, let’s discuss why both might deserve a place in your portfolio.

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How Dividend Growth Can Power Your Portfolio

In my article title, I referred to dividend growth as “powering” your portfolio. Why did I choose that particular word? If you have ever driven a turbocharged automobile, much less a Tesla, you have experienced the sensation of acceleration, power, when depressing that pedal on the right.

Dividend growth can power your portfolio forward in much the same way. Yes, you can generate a regular flow of income from bonds. But this flow is static and, for a variety of reasons, it can even decrease relative to your investment.

You can also invest in stocks that yield high current income. That is good for the present. However, such stocks often tend to be in slow-growth industries, and dividends may increase slowly if at all. Worse yet, it is not uncommon for an excessively high yield to disguise a stock that is in trouble, possibly on the brink of financial disaster.

In contrast, regular and consistent dividend growth tends to be a hallmark of companies that maintain excellent financial discipline. Such companies believe in using excess cash to reward shareholders as opposed to embarking on risky and ill-advised acquisitions or similar financial adventures.

A recent graphic I came across features this nicely. Spanning roughly the last 10 years, it compares how dividend growth stocks compare both to other income-producing options, as well as the broader market. For clarity, the heavier teal-colored line represents the broader market.

As can be seen in the footnote text in the graphic above, what they refer to as bond proxies have fared worse than dividend growers, and stocks with the highest dividends tend to be even more problematic. With that overview, let’s take a look at our two featured Vanguard offerings.

Vanguard Dividend Appreciation ETF (VIG)

With an inception date of 4/21/06, I have previously referred to Vanguard Dividend Appreciation ETF (VIG) as the “grand old man” in this segment. Not only that, but with almost $72 billion in Assets Under Management (AUM), it ranks among the largest 20 ETFs in the world.

Over the years, however, several competitors sprang up, challenging VIG in the dividend-growth segment. Not the least of these is iShares Core Dividend Growth ETF (DGRO). In fact, on another platform for which I write, I selected this as my favorite in the segment for 2019.

Recently, however, as my colleague David Dierking featured, and I also explained in a note to readers, Vanguard made a change to the target benchmarks for both VIG as well as its stablemate, targeted at foreign stocks. Let’s take a look at the major changes, using VIG as our main reference, and then we will examine the foreign version in the next section.

Happily, despite the change of index, VIG retains its essential character. One of the key requirements of the former index was that a stock had to have increased its dividend for at least 10 consecutive years to be a candidate for inclusion. Go back and look at those italicized words again, Think back to the multiple varieties of turmoil we have experienced together in the last 10 years. For a company to have been able not only to maintain, but increase its dividend each year over that span is a testament to both the strength of its business model as well the soundness of its financial management.

In the new index? Nothing has changed with respect to this. That benchmark is still intact. However, in perhaps a nod to the concept that recent upstarts have outperformed VIG in terms of absolute performance, including growth, the equity sectors have been adjusted a little bit.

First, the existing structure.

Next, the revamped structure, based on the new index.

In the above screen capture, I have used red arrows to feature the single most worthy item of note; namely the 6% increase in the technology sector (19.4% vs. 13.4%) and the roughly offsetting decrease in the industrials sector (only 15.5% vs. 22.1%).

As mentioned, these adjustments may well offer opportunities for slightly better growth, while maintaining the existing discipline with respect to a stellar dividend history.

Here’s a look at the top-10 holdings in the revamped index.

Source: S&P U.S. Dividend Growers Index (USD) Factsheet

Source: S&P U.S. Dividend Growers Index (USD) Factsheet

One other minor adjustment in the new index that intrigued me is that periodic changes to add, remove, or rebalance the constituent stocks in each index will take place over three days instead of one day.

This may not seem like a huge deal, but Vanguard maintains that it will help them both manage transaction costs and minimize tracking error. As opposed to being forced to complete all trades within one business day, when other traders might use that knowledge to their own advantage, all necessary transactions can be conducted in a more orderly manner.

Vanguard International Dividend Appreciation ETF (VIGI)

For your portfolio to be truly diversified, it should include some allocation to foreign stocks. For any interested in further reading, I discuss both the benefits of doing so, along with some of the risks involved, in this educational article. And while it is absolutely the case that U.S. stocks have outperformed their foreign counterparts in recent years, don’t let recency bias negatively impact sound investment decisions.

Likely for these and other reasons, on February 15, 2016, roughly 10 years after the inception of VIG, Vanguard decided to expand their coverage of the dividend-growth segment beyond the borders of the U.S., with the inception of the Vanguard International Dividend Appreciation ETF (VIGI). Reflecting the increased costs associated with trading foreign securities, VIGI’s expense ratio is .20%.

Let’s take a quick look at how the updated indexes play out in the case of this ETF. Again, in one key element, the new index remains consistent with the former index. For this international version, seven consecutive years of dividend increases are required, as opposed to the 10 consecutive years in the U.S. version of the ETF.

Similar to its U.S. counterpart, this version of the index also excludes the top 25% highest-yielding entitles otherwise eligible for inclusion. Again, as mentioned earlier in the article, this is a conservative approach, as an excessively high yield can sometimes signal pending financial distress.

Here is a look at the sector breakdowns of the international version.

The most significant variation from its U.S. counterpart is that health care is weighted far more heavily in the international ETF, with information technology absorbing most of the difference in the other direction.

You will see that play out in this next graphic, which captures what will ultimately be VIGI’s top 10 holdings once the new index is fully implemented.

Source: S&P Global Ex-U.S. Dividend Growers Index Fact Sheet

Source: S&P Global Ex-U.S. Dividend Growers Index Fact Sheet

As can be seen, 4 of VIGI’s top 10 holdings are some of the finest pharmaceutical companies in the world. Also prominently present are Nestle SA, the world’s largest food & beverage company, as well as Diageo PLC, owner of some of the largest and most recognizable brands of alcoholic beverages in the world. Is it any wonder that, in both good and bad economic times, the 6 businesses briefly featured have consistently grown their dividend?

One last graphic from the same fact sheet. I carved out the top-10 countries/regions present in the index.

Source: S&P Global Ex-U.S. Dividend Growers Index Fact Sheet

Source: S&P Global Ex-U.S. Dividend Growers Index Fact Sheet

If you were to sum those weights, you would find that these countries comprise 86.5% of the total index. The biggest change I noticed as compared to the former index is that India dropped from 12.8% in the former index to 6.5% in the current index. Japan and Canada were the two most significant offsets, with their weightings rising in the current index.

Summary

In this article, I have submitted that dividend-growth stocks deserve a place in your portfolio, providing an opportunity to reap the benefits of an ever-growing income stream.

In these two ETFs, investment powerhouse Vanguard offers the opportunity to harvest these dividends from virtually all corners of the globe. As I featured in a previous article on this very site, you can get the world for 7 basis points or less. However, if dividend-growth is your thing, I think you might find that you can incorporate a nice allocation to both VIG and VIGI into your portfolio while keeping your overall expense level within that same range!

Until we have the chance to speak again, I wish you . . .

Happy Investing!

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