VIG: More Downside Protection And Dividend Growth

Many retail investors like to pick their own stocks and when done right, that can be a winning strategy. However, sometimes one may need to hedge against potential missteps or portfolio concentration in just a few stocks with diversified ETFs that provide immediate broad diversification.

This brings me to the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), which may serve as a good alternative against the S&P 500 (SPY). In this article, I highlight why VIG is a good option for total return focused investors, so let’s get started.

Why VIG?

Vanguard Dividend Appreciation ETF seeks to track the performance of a basket of very large common stocks that have a record of increasing dividends over time. Its charter is to track the performance of the S&P U.S. Dividend Growers Index.

VIG’s focus on dividend paying companies has served investors well. As shown below, VIG’s 3-year total return performance of 28% has beaten that the S&P 500’s return of 24%.

Moreover, unlike the S&P 500, VIG isn’t dominated by non-dividend or low dividend paying companies like Tesla (TSLA), Amazon (AMZN), Google (GOOG)(GOOGL), and Apple (AAPL). These aforementioned companies have an outsized influence on the S&P 500 due to their gigantic market caps, and the downturn in their share prices over the past 12 months have had a detrimental effect on the S&P 500.

Comparatively speaking, VIG’s broad diversification on dividend growers gives it more downside protection. As shown below, VIG has greatly outperformed the S&P 500 over the past 12 months, declining by just 10% compared to the 19% decline for the S&P 500.

VIG’s top 10 holdings are comprised of dividend aristocrats and high dividend growers, like UnitedHealth Group (UNH) and Visa (V). UNH and Visa have impressive 5-year dividend CAGRs of 17% and 18%, respectively. Also, as shown below, no other stock besides UNH represents more than 4% of VIG’s total holdings.

Risks to VIG include the potential for a recession, as it does have meaningful exposure to Financial stocks, which as shown below, its VIG’s largest segment comprising 20% of total. However, many economists are predicting a mild recession, if any, and many banks are far better capitalized with safer operating models due to regulations coming out of the Great Financial Crisis.

In fact, one of VIG’s top 10 holdings, JPMorgan Chase (JPM), is well capitalized with a CET1 ratio of 12.5% and management is targeting a 13% ratio by the first quarter of this year. Plus, JPM’s CEO Jamie Dimon noted its preparedness with CECL (current expected credit losses) reserves and its ability to add to that if needed, as noted during a recent conference call:

CECL already incorporates a percent of what we think the adverse consequences might be. But obviously, if the environment gets worse, we’ll have to add to reserves. And/or if we change our outlook, meaning that we think the chance of adverse events are higher, we’ll change our reserves.

Put in the back of your mind that if unemployment goes to 5% or 6%, you’re probably talking about $5 billion or $6 billion over the course of a couple of quarters. Again, easy to handle, not a big deal. It just doesn’t affect capital a little bit.

Meanwhile, true to Vanguard form, VIG maintains one of the lowest expense ratios in the ETF sector, at just 0.06%, sitting well below the 0.40% median across all ETFs. Also, VIG earns an A+ Dividend Grade, supported by nine years of consecutive growth and a 3-year dividend CAGR of 11.7%.

Finally, Seeking Alpha’s Quant rating assigns VIG a Buy rating with a score of 4.3 out of 5. As shown below, VIG scores A grades for momentum, expenses, dividends, and risk.

Investor Takeaway

Vanguard Dividend Appreciation ETF provides investors with an attractive option for total returns and higher dividend yield than the S&P 500. Its performance has beaten that of the S&P 500 over the past one and three years, due to its lower exposure to stocks with gigantic market capitalizations. This gives VIG investors more downside protection. Lastly, I view VIG as being a solid choice at the current price of $151 for immediate diversification and potentially strong long-term returns.