Vanguard Dividend Appreciation ETF (VIG) vs Individual Stocks
When I started invested I stayed diversified by investing in ETFs. Since I began without much money, commission-free ETFs, like Schwab’s Dividend Equity ETF were very appealing.
I’ve always liked the concept of investing in dividend growth companies and an ETF was a good exposure to that sector, allowing me to purchase shares each month without worrying about paying a lot in commissions.
SCHD is an ETF that tracks the Dow Jones U.S. Dividend 100 Index. Eligible stocks must have sustained at least 10 consecutive years of dividend payments, have a minimum float-adjusted marketcapitalization of $500 million and then are weighted in the portfolio by four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate. Source: Prospectus
The Vanguard Dividend Appreciation fund is another quality dividend paying ETF that also focuses on similar criteria. VIG Prospectus
One of the questions that I’ve always had in regards to these kind of ETFs is:
Do they really provide the same level of income and dividend growth as holding the individual stocks?
These ETFs definitely provide diversification since it would be nearly impossible to own shares in every single company that VIG or SCHD owns. VIG has 182 stocks currently in its portfolio!
Since the ETFs provide better diversification, wouldn’t it then make more sense to just buy the dividend ETF?
For this analysis I used Vanguard’s VIG dividend paying ETF. Despite owning SCHD in the past, I picked VIG for a couple of reasons. First, it has been around longer so it has more historical data available. Also, it is also the larger and probably more popular of the two.
I imported all 182 current holdings of VIG into a spreadsheet, including each stock’s percent of net assets. I then imported the current annual dividend and manually copied from Schwab’s dividend stock research page, the 3-yr, 5-yr, and 10-yr compound annual growth rate (CAGR) of the dividends.
You can view this spreadsheet here.
Here are the results of holding each individual stock at the same weighting that it is held by VIG:
Weighted average current dividend yield: 2.43%
Weighted average 3-year dividend growth: 12.77%
Weighted average 5-year dividend growth: 12.97%
Weighted average 10-year dividend growth: 16.74%
3-year CAGR of VIG dividends (2012-2014): 3.98%
5-year CAGR of VIG dividends (2010-2014): 8.63%
8-year CAGR of VIG dividends (2007-2014): 7.74%
Current yield of VIG: 2.34%
Note: 2007 was the last year that I could find a complete year of distribution data. Also, I did not include 2015 in these calculations because the 4th quarter distribution is still coming at the end of December. I will update this data when that information is available.
What did I learn?
1) VIG pays a dividend yield that is similar to what you’d get yourself if you owned each stock it holds at the same weighting. Income-wise, it would essentially be a wash.
2) While VIG has a track record of raising dividends by 3.98%, 8.63%, and 7.74% over 3-, 5-, and 8-year periods, the distribution increases are a lot less than buying each stock individually.
3) There have been a few years (2008-2009 and 2012-2013) where the annual distribution decreased. Although I didn’t specifically look at the individual stock dividend growth or decrease during that short of a time period, I find it unlikely that a portfolio consisting of the same stocks would have also seen its annual dividend drop. What happened to VIG’s missing dividend increases during those quarters? Who gets it?
As a take-away, I feel that by creating your own smaller portfolio you can not only construct a portfolio with a higher yield but also with a better dividend growth rate.
VIG is a great way to gain exposure to dividend growth companies but is not as good as owning the stocks individually.
What do you guys think? Did this kind of fit with your gestalt of this ETF?