Why This Standout Vanguard Dividend ETF Is Better Poised for Growth Than You Think

There's a perception among investors in exchange-traded funds that certain types of stocks are mutually exclusive. For example, some ETFs pitch themselves as ideal for investors looking for maximum growth, while others point to the benefits of dividend stocks that regularly pay streams of income to their shareholders. The idea is that putting together an ETF portfolio that incorporates multiple strategies will automatically give you a diversified portfolio.

As it turns out, though, that's not always the case. With the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG), for instance, investors get an income-oriented ETF that's not nearly as anti-growth as some of its peers. In this final article on the Vanguard ETF for the Voyager Portfolio, you'll see just how important it is not to make assumptions about the investments you're making within the exchange-traded fund world.

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A typically defensive portfolio -- but with a twist

At first glance, the Vanguard Dividend Appreciation ETF's sector exposure looks generally consistent with what you see in a lot of funds. Defensive sectors like consumer staples and healthcare have significant overweight exposure than the S&P 500. Financial services stocks also make a strong showing. By contrast, there's less exposure to higher-growth sectors such as technology and communication services. This is typical among dividend ETFs because tech stocks tend to reinvest more of their available capital back into growing their businesses internally and are less likely to pay significant dividends.

Yet when you look a little more closely, you'll see some key differences between Vanguard Dividend Appreciation and its peers. As it turns out, three of its top four holdings are indeed tech stocks: Broadcom (NASDAQ: AVGO), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT). Those three holdings alone make up about 13% of the ETF's assets and account for roughly half of the fund's tech exposure.

How did tech stocks get into the Vanguard ETF's portfolio?

Most dividend investors aren't used to seeing tech stocks like these among a dividend ETF's holdings. The reason is simple: Broadcom currently has a dividend yield of 0.8%, while Apple's yield is 0.4%, and Microsoft's is just under 1%. Those figures are all below what you'd get in dividends simply from investing in an S&P 500 ETF.

Here, though, it's the Vanguard Dividend Appreciation ETF's unusual methodology that increases its exposure to more growth-oriented stocks. Vanguard Dividend Appreciation isn't looking for the highest-yielding stocks; in fact, it goes out of its way to exclude top yielders. Rather, its approach is to identify stocks that have consistently grown their dividends over periods of a decade or more.

In that light, several tech companies have actually made considerable progress toward becoming dividend growth stocks. Over the past five years, Microsoft has boosted its dividend by 63%. Broadcom's has jumped by more than 80%. Apple has followed a strategy more typical of mature companies making a token effort to remain eligible for dividend-growth screens, boosting its payout by a penny per share each year to bring its total growth since 2021 to just 18%. Nevertheless, considering their sheer size, the total dividend payments from these companies are enormous, ranging from $11.5 billion for Broadcom and $15.5 billion for Apple to more than $25 billion for Microsoft.

Don't be fooled

For investors who don't already own growth stocks, Vanguard Dividend Appreciation actually does a good job of offering a diversified portfolio that isn't devoid of good growth prospects. But if you're looking for an ETF that complements an already growth-heavy portfolio, you might not want more exposure to stocks like Broadcom, Microsoft, and Apple. That's a lesson that the Voyager Portfolio can apply not just in considering ETF investments but in putting together its individual stock portfolio as well.

Dan Caplinger has positions in Apple, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Microsoft, and Vanguard Dividend Appreciation ETF and is short shares of Apple. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.