One way to incentivize yourself to invest for the long term is to hold income-generating investments in your portfolio. That way, you can ensure you’re collecting a steady stream of cash over the years, even without having to sell your investments. Exchange-traded funds (ETFs) can provide you with many excellent options for the long term, and you don’t have to feel locked in and focus strictly on growth stocks or just dividend stocks.
Two Vanguard funds that give you the best of both worlds and pay high dividends while also providing you with some terrific growth prospects are the Vanguard Dividend Appreciation Index Fund ETF (VIG 0.65%) and the Vanguard Consumer Staples Index Fund ETF (VDC 1.34%). Here’s a look at why these ETFs can be ideal options for all types of investors.
Vanguard Dividend Appreciation Index Fund ETF
The S&P 500 averages a yield of 1.3%, and you can collect a higher payout with the Vanguard Dividend Appreciation Index Fund ETF — its yield is 1.7%. But on top of that, your dividend income is also likely to rise with this ETF because as the name suggests, it focuses on dividend appreciation. The fund includes stocks that have excellent track records of increasing their dividend payments over the years.
The passively managed fund holds shares of top dividend stocks such as UnitedHealth Group, ExxonMobil, and Home Depot. There are 338 stocks in the fund as of the end of September, providing investors with some excellent diversification through a wide range of sectors. And even though it’s focused on dividend growth, tech stocks account for 24% of the portfolio’s total weight, making that the largest sector, with financial stocks being in the second spot with a 20% representation.
By focusing on tech stocks and some of the biggest companies in the world, the Vanguard Dividend Appreciation ETF can enable you to earn some excellent returns over the years while you also collect a growing dividend. Over the past 20 years, the fund has for the most part kept up with the S&P 500. And with a low expense ratio of 0.06%, fees won’t put a big dent in your returns.
^SPX data by YCharts
Vanguard Consumer Staples Index Fund ETF
If a growing dividend is not too important to you, then the Vanguard Consumer Staples Index Fund ETF could be a more suitable option. Its yield of 2.5% is already firmly higher than the Dividend Appreciation ETF’s payout. And so while it may not prioritize dividend growth stocks, it still has plenty of solid income-paying investments in its portfolio right now.
By focusing on consumer staples, the fund gives investors exposure to businesses that should do well as the economy is in good shape and consumers are spending on a wide range of products. Some of the top stocks in the fund are Costco Wholesale, Coca-Cola, and Colgate-Palmolive. It contains 105 stocks, which isn’t as diversified as the Dividend Appreciation ETF, but that also means its returns can be stronger in the long run if its top holdings do well.
Although economic conditions may not be looking great right now with inflation still creating problems for consumers, the economy should recover and continue to grow over the long run. And investing in this fund can be a great way to invest in the overall stock market. For much of the past 20 years, the ETF has outperformed the S&P 500 up until the past few years when the broader index has been taking off at a much faster rate than usual. This Vanguard fund also has a fairly low expense ratio of 0.10%.
^SPX data by YCharts
Given the S&P 500’s inflated value right now, going with the Vanguard Consumer Staples ETF may be the better option today, as its more modest valuation could put it on track to generate better returns in the long run.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
