Plan for Future Dividend Payments with This ETF

If you are aware that you will need larger dividends in the future, it's essential to start planning for that today.

At a stage in your investing journey where you simply want to set aside some capital and earn dividends? Great news! There are straightforward options available. A single investment in an exchange-traded fund (ETF) can be an effective strategy, no matter how experienced you are in investing.

The ETF to consider is the Vanguard Dividend Appreciation ETF. Let’s break it down.

Understanding the Vanguard Dividend Appreciation ETF

An ETF is essentially a collection of stocks that allows you to diversify your investments easily. These funds, which can be traded just like regular stocks, typically hold dozens to hundreds of different stocks. The value of an ETF changes constantly based on the combined value of its individual holdings.

The Vanguard Dividend Appreciation ETF consists of a selection of stocks that not only pay dividends but are also likely to increase those payments over time. This ETF is structured to track the S&P U.S. Dividend Growers Index, which mandates that a company must have increased its annual dividend for at least ten consecutive years to be part of the index.

Currently, 338 companies qualify for the S&P U.S. Dividend Growers Index. These firms are often capable of sustained growth in their dividend payouts well beyond this ten-year threshold.

While the ETF's trailing dividend yield stands at 1.6%, which isn't particularly exciting, it’s better than the current yield of the S&P 500, which is around 1.2%. That average includes many stocks that do not distribute dividends at all!

However, the true value lies beyond just the yield.

Looking at the Bigger Picture

Diving into stocks with exceptionally high yields is a common pitfall for novice investors. You might enjoy a higher return initially, but if you are aiming for consistent, long-term passive income, these high-yield stocks may ultimately be detrimental to your financial goals.

High-yield stocks often carry those elevated yields for specific reasons. Frequently, the market’s concerns stem from the uncertainty surrounding their ability to maintain or grow those dividends. For example, the consumer staples giant Kraft Heinz boasts a forward-looking yield of 5.1%, significantly higher than the typical yield for blue-chip companies. However, this firm’s dividend has remained unchanged since it was reduced in 2019, lacking any sign of future growth.

This is why many investors willingly accept a lower starting dividend yield; they anticipate reliable and significant increases in dividends down the line.

The Vanguard Dividend Appreciation ETF has a solid track record in this area. Its most recent quarterly payout of $0.835 per share is approximately 50% higher than it was five years ago and more than double what it offered ten years ago, comfortably outpacing inflation!

Interestingly, while those focused on income often gravitate towards dependable dividend growers for their yield, these investments frequently experience substantial price appreciation as well.

According to research from mutual fund provider Hartford, since 1973, stocks that have the policy and capability to increase dividends have averaged annual returns of just over 10%. This is significantly higher than the mere 4% annual gain typically seen in non-dividend paying stocks.

Furthermore, there is a 70% likelihood that strong dividend-paying stocks will outperform the S&P 500 in any given year, while the odds for mediocre dividend payers is less than 50%. This correlation suggests that firms capable of consistent dividend growth are usually well-managed and adept in other areas of business as well.

Additionally, past performance can often provide insight into a stock's potential future results.

Simplicity is Key

While the Vanguard Dividend Appreciation ETF is not your only option for dividend investing, as you can also select individual dividend-paying stocks and other dividend-focused ETFs, it stands out as a strong choice for those wanting a long-term, hands-off investment.

If you desire a reliable source of passive income that allows for minimal management over decades, this ETF may be your best choice. Once you've invested, there's no need for continuous buying or selling. S&P will adjust the underlying index as necessary, while Vanguard will replicate these changes within the ETF.

All that's left for you is to decide whether to reinvest your dividends or simply enjoy the income they're providing.

dividends, investment, ETF