While consumer prices eased slightly in February, the stubborn inflation and tight job market could compel the Fed to raise interest rates. This and the recent turmoil in the banking sector could keep the stock market under pressure. Therefore, I wanted to discuss the benefit of investing in an ETF that can offer a steady income stream. I am talking about the Vanguard Dividend Appreciation ETF (VIG).
Despite a slower increase in February, inflation remains far above the 2% target rate, which calls for aggressive interest rate hikes by the central bank. However, the recent insolvency issues in the banking sector could compel the Fed to increase the interest rates marginally or keep them unchanged in its meeting next week. Goldman Sachs (GS) believes the Fed would pause its rate hikes for now but resume them for its May meeting.
On the other hand, the job market added 311,000 jobs in February, surpassing economists’ estimates of only 205,000, indicating a tight labor market. Ahead of the FOMC meeting next week, the market is still attaching a significant probability to a 25-basis-point interest rate increase.
Given this backdrop, as the stock market is expected to remain volatile for some time, it could be wise to focus on generating a steady income stream instead of capital appreciation. To that end, VIG could be a wise investment, given the attractive dividends it pays.
Tracking the S&P U.S. Dividend Growers Index, VIG offers exposure to U.S. large-cap dividend-paying companies. These companies have a record of increasing dividends over time, providing investors with a well-balanced portfolio and a long-term investment option.
The ETF has gained 1.2% over the past six months to close its last trading session at $148.05. It has a five-year beta of 0.84, indicating lesser volatility than the overall market.
Here are the factors that could influence VIG’s performance in the upcoming months:
This ETF’s stocks have a $141.10 billion average market capitalization. As of March 15, VIG had a Net Asset Value (NAV) of $147.96. Its net assets amounted to $76.31 billion. Its expense ratio of 0.06% is lower than the category average of 0.37%.
Over the past year, VIG’s net inflows came in at $2.46 billion. Its net inflows stood at $541.18 million over the past six months and $61.79 million over the past month.
The fund’s top sector is Information Technology, with 23.6% weight, followed by financials, with 15.7%, healthcare, with 14.80% weight, industrials, with 13.5% weight, and consumer staples, with 13% weight.
VIG’s top holdings include UnitedHealth Group Incorporated (UNH), with a 3.70% weight, Microsoft Corporation (MSFT), with a 3.56% weight, JPMorgan Chase & Co. (JPM), with a 3.50% weight, Johnson & Johnson (JNJ), with a 3.33% weight, and Visa Inc. (V), with a 2.90% weight.
VIG has a trailing-12-month dividend rate of $2.97, which yields 1.99% on the current price level. It has a 30-day SEC yield of 1.93%. The fund also has a four-year average yield of 1.77%. Its dividend payouts have increased at an 11.7% CAGR over the past three years and a 9.2% CAGR over the past five years. The ETF has grown its dividend for nine consecutive years.
POWR Ratings Reflect Promising Prospects
VIG’s solid prospects are reflected in its POWR Ratings. The ETF has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
VIG has a Trade, Buy & Hold, and Peer grade of B. In the 274-fund Large Cap Blend ETFs group, it is ranked #34.
Click here to see the POWR Ratings for VIG.
View all the top stocks in the Large Cap Blend ETFs group here.
As large-cap companies usually help investors ride out market volatility and dividends provide an added defensive layer to investment portfolios, this large-cap dividend ETF, with strong fund stats, could be a solid buy now.
How Does Vanguard Dividend Appreciation ETF (VIG) Stack up Against Its Peers?
While VIG has an overall POWR Rating of B, one might consider looking at its peers, VanEck Morningstar Wide Moat ETF (MOAT) and Global X NASDAQ 100 Covered Call ETF (QYLD), which have an overall A (Strong Buy) rating.
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VIG shares were trading at $148.95 per share on Thursday morning, up $0.90 (+0.61%). Year-to-date, VIG has declined -1.91%, versus a 2.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...
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