Key Points
If you’re looking to generate more income from your investment portfolio, dividend-paying stocks can be a great place to start. When a company pays a dividend, it distributes a portion of its profits to shareholders. That means you can earn income simply by owning the stock, even if you don’t sell your shares.
For retirees, dividend income can be especially valuable because it can help supplement Social Security benefits. And whether you’re retired or not, dividend income can serve as a hedge against market downturns. Even if your portfolio value declines, dividend payments can continue, providing a stream of income while you wait for the market to recover.
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Of course, picking individual dividend stocks isn’t always easy. You have to evaluate a company’s financial health, dividend history, and ability to keep increasing its payouts over time.
If you’d rather keep things simple, you may want to consider investing in the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG).
Why the Vanguard Dividend Appreciation ETF deserves a place in your portfolio
The Vanguard Dividend Appreciation ETF tracks an index of U.S. companies that have increased their dividends for at least 10 consecutive years. Rather than chasing the highest dividend yields, the fund focuses on companies with a long history of consistently increasing dividends. This strategy favors financially strong businesses and naturally screens out companies with inconsistent earnings or unstable dividend policies.
Like many Vanguard funds, the Vanguard Dividend Appreciation ETF also keeps costs extremely low. The fund has an expense ratio of just 0.04%, meaning you’ll pay only about $4 per year for every $10,000 you invest.
Keeping fees low could have a meaningful impact on your long-term returns. That’s because more of your investment stays in your portfolio instead of going toward fund expenses.
What you need to know before investing
Although the Vanguard Dividend Appreciation ETF can be an excellent choice for investors focused on income, it’s not risk-free by any means. The fund still invests in stocks, which means it can be volatile and lose value during a market crash. While the dividends it pays may help cushion the blow, they won’t necessarily eliminate market losses.
The Vanguard Dividend Appreciation ETF isn’t designed to maximize dividend income so much as provide stable dividend income. You’re likely to find other funds with higher yields, so you’ll need to ask yourself what you value more: bigger dividend payments or more consistency.
All told, the Vanguard Dividend Appreciation ETF may be a good fit if you’re looking for an investment that combines the potential for income with opportunities for long-term growth. It can work well if you’re saving for retirement or if you’re already retired and want a steady stream of dividend income alongside your Social Security checks.
Should you buy stock in Vanguard Dividend Appreciation ETF right now?
Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.