If you’re looking for an ETF that’s capable of generating decades of consistent, predictable passive income, you’re looking for stocks capable of doing the same.
Sure, high-performing companies might generate more revenue, but there’s always the question of whether those returns are sustainable. An economic downturn could easily lead to some of those big payments being cut.
In my opinion, what you are looking for are companies that have not only paid dividends for years, but have also grown them. That demonstrates commitment and ability to continue generating the cash flows and profits necessary to continue rewarding shareholders indefinitely.
That’s why he Vanguard Dividend Appreciation ETF(NYSEMKT: VIG) It is an excellent option to obtain long-term income. Of course, the current 1.6% yield probably won’t excite anyone too much, but if your time horizon is decades and you want a portfolio that’s durable enough to get you there, VIG is worth a look.
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VIG tracks the S&P US Dividend Producers index. This index targets US companies that have increased their annual dividend for at least 10 consecutive years, but does not include the top 25% of highest-yielding stocks. Qualified stocks are then weighted by market capitalization.
There are a couple of things worth noting about this approach.
First, immediately removing the highest yields improves portfolio quality. Some of these stocks could be called “yield traps,” meaning they are high because of falling stock prices, not better financial performance. Those are the stocks that are vulnerable to shortcuts and below-average returns.
Second, unfortunately that screen also eliminates some genuine high-performance products. Some of the traditionally top-performing sectors, including real estate, energy and utilities, have a minimal presence in VIG’s portfolio. Investors should probably never expect the Vanguard Dividend Appreciation ETF to be a major source of income.
Third, the cap-weighting methodology produces a different portfolio composition than many of VIG’s peers. It basically ignores track record, quality, and dividend yield and simply gives the largest weights to the largest companies. This becomes evident when one sees that VIG’s three largest holdings, Broadcom, microsoftand Appleall have returns less than 1%. That helps the fund’s growth profile, but it doesn’t help its income prospects.
The reason I consider dividend growth to be the appropriate yardstick for measuring long-term income success is the commitment it entails. Companies with a long history of not only paying dividends but increasing them have essentially committed to keeping them that way indefinitely. Paying a dividend is fine. Growing a dividend consistently means it’s a priority.
Sure, some high-yield stocks also have streaks of dividend growth. But high performance could be more vulnerable to instability. If a company is under any type of financial pressure, cutting the dividend may be the easiest way to raise capital.
Quality is perhaps the most important factor for a stock. It signals a level of financial health that gives the company some flexibility, but that doesn’t mean it will prioritize the dividend. You can choose to focus on buybacks or reinvest the money in the business.
Dividend producers have shown that they are focused on paying shareholders regularly. That’s the most important factor when judging the long-term sustainability of dividends. The ability to generate income that can stay ahead of inflation helps ensure that shareholders are rewarded with consistent purchasing power.
A look at the Vanguard Dividend Appreciation ETF portfolio shows that its dividend growth strategy is backed by quality. Most of the companies in the portfolio are large cash flow generators that are constantly growing their revenues and profits.
Those are the kinds of companies that belong in almost any portfolio. The ability to generate decades of passive income makes VIG a great option for investors.
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David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool holds positions in and recommends the Apple, Microsoft, and Vanguard Dividend Appreciation ETFs. The Motley Fool recommends Broadcom and recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Do you want decades of passive income? Buy This Index Fund and Hold It Forever was originally published by The Motley Fool
