1 Great Reason to Buy the Vanguard Dividend Appreciation ETF (Hint: It's Not for the Income)

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Many investors, especially younger ones, don't fully appreciate dividend stocks. Since they don't need the income (like retirees do), they figure they don't need to invest in dividend-paying stocks. There's a big problem with this view: Dividend stocks are proven wealth builders. Over the last 50 years, dividend stocks have outperformed non-payers by more than two-to-one (9.2% average annual-total return to 4.3%, according to data from Ned Davis Research and Hartford Funds).

The data on dividend-stock returns makes the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) a great investment. The exchange-traded fund (ETF) focuses on a particular group of dividend stocks that have historically delivered the highest total returns.

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Appreciating the benefit of dividend growth

Vanguard Dividend Appreciation ETF is a passively managed fund that aims to track the performance of the S&P U.S. Dividend Growers Index. That index strives to measure the performance of companies that have increased their dividends annually for at least 10 straight years (excluding the top 25% highest yielders). The index focuses more on dividend growth than income.

That emphasis on dividend growers is noteworthy. That's because the same data from Ned Davis Research and Hartford Funds found a notable difference between the returns of dividend stocks by their dividend policy:

Dividend policy

Returns

Dividend growers and initiators

10.2%

No change in dividend policy

6.7%

Dividend cutters and eliminators

-0.6%

Data source: Ned Davis Research and Hartford Funds.

That data shows that dividend growers delivered the highest returns among dividend stocks by a significant margin.

It's also noteworthy that the index excludes the top 25% of stocks by dividend yield. Companies with higher-dividend yields tended to have higher-payout ratios, putting them at higher risk of being unable to grow their dividends if they faced financial challenges. So, by excluding the highest yielders, the fund has an increased focus on companies likely to continue growing their dividends.

Like the index it tracks, the Vanguard Dividend Appreciation ETF holds 338 stocks that have delivered at least a decade of consistent dividend growth. That focus on dividend growth has paid off for fund investors over the years. The fund has delivered a double-digit average annual-total return over the last one-, three-, five-, and 10-year periods. Meanwhile, the average annual-total return since its inception is just under 10%.