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 β€” 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?

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11 Responses

  1. Gotta love those commission free ETF’s. Nice way to add instant diversity. I was just looking at Vanguards Long Bond ETF myself. (BLV)

  2. FerdiS says:

    Nice article! I’ve looked at some of these ETFs with a bit of skepticism. Although there’s much to be said for the increased diversification, the performance seem to be suspect. However, I think some of these are great for investors that do not have the time or inclination to build up their own portfolios.
    FerdiS recently posted…Recent Transfer: Texas Instruments, Inc.My Profile

    • scott says:

      Hi FerdiS,

      I think your analysis is spot on, the convenience of these ETFs with instant diversification and decent dividend growth is great for most investors. However, those of us writing blogs and commenting on them, generally have more fun doing it ourselves!

  3. DivGuy says:

    I’ve always got a better growth rate buying individuals stocks. I’ve compared my result a few times and I always beat them.

    It does take a little more time, but it’s worth it.


    DivGuy recently posted…… And we Thought the Canadian Economy Depended on OilMy Profile

    • scott says:

      Hey Mike,

      I completely agree. Plus, if you’re investing rather than trading, the investment fees are negligible over the long term.

      Have you figured out a good way to compare your results to the market, say the S&P 500? I tried to create a spreadsheet where I’d match each of my stock purchases and dividend reinvestments with a dollar equivalent amount of the SPY so that the inflow and outflows are the same. The issue for me, I think, was the difficulty in smoothly pulling in historical SPY data. Since I’ve gotten better at importXML, I might give it another try. In the meantime, I’ve just been using tools such as Personal Capital.

  4. DivHut says:

    I have gone the individual stock route though I can see the benefits of owning an ETF especially when it comes commission free and offers a compelling yield which for me is anything over 3%. I’ll continue with individual stocks for my own portfolio but I do not look down on those who buy into ETFs. I know there’s a great debate that rages on this topic. Thanks for sharing.
    DivHut recently posted…January 2016 Stock ConsiderationsMy Profile

    • scott says:

      Good points! The commission free ETFs are definitely nice. Since my brother isn’t as excited about the investing as I am, I’ve mostly recommended those ETFs to him (along with a few individual stocks). They are much easier to keep track of!

      The biggest thing is to just get started investing, preferably into investments with as little fees as possible!

      Thanks for commenting!

  5. I have always liked the thought of an ETF. It seems like a perfectly sound way to go for those who do not have the time nor the desire to actively manage their portfolio. However, as has been pointed out before, fees tend to eat into the return. Those hungry brokers have to eat also. Nice article.

    Keep cranking,

    Robert the DividendDreamer
    AKA — Seeking Dividends
    dividenddreamer recently posted…How to Trade Your IRA and Grow Your Retirement Nest EggMy Profile

    • scott says:

      Hi Robert,

      There are definitely much worse places to put your money than into one of the broader market ETFs. I remember not too long ago (in the 90s) when I was invested in some mutual funds. I remember thinking that a few of those at around 1.5% fees weren’t too bad. We’re now looking at around 0.02% for some of better ETFs. Can’t complain at all about fees like that!

      Thanks for visiting and have a great New Year.

  6. Chris@TTL says:

    VIG seems like the ideal choice if the investor wants to aim for dividends but wants to reduce the risk of holding individual stocks which would be more volatile.

    It’d also reduce the bankruptcy risk that comes with those individual stocks through diversification.

    Of course, diversifying your dividend portfolio enough to be effective probably means you should just hold an ETF anyway to help reduce trading costs. πŸ™‚

    Good overview between the old ETF vs stock debate as it pertains to these dividend concerns.
    Chris@TTL recently posted…ETF vs Stock: Invest to Be Bill Gates (or Just Be in the Bar)?My Profile

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