Could Investing in This Dividend ETF Make You a Millionaire?
Key Points
The Vanguard Dividend Appreciation ETF (VIG) looks for large-cap companies with at least 10 consecutive years of annual dividend growth.
Its market-cap-weighting strategy gives the fund a heavier-than-average allocation to tech and growth.
On a total return basis, VIG still has the goods that can turn investors into millionaires.
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The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) is one of the largest and most popular dividend ETFs. Because it focuses on long-term dividend growers and eliminates the top 25% of yields from immediate consideration, it's not an income machine.
That doesn't mean it doesn't have value in a portfolio. Because of its weighting methodology, which focuses on company size rather than any particular dividend characteristic, the fund has a growth tilt that many similar funds don't offer.
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In other words, it may not be ideal if you're looking for big monthly dividend checks. But it can work on a total return basis if your goal is to build your portfolio to $1 million or more.
Image source: Getty Images.
The math to get to $1 million
A $1 million goal isn't an easy one to accomplish, but it's achievable. But to get there, you need to know what to do. A few simple calculations using any current balance you're starting with, how much you plan to contribute every month, and your expected annual return are enough to figure out how long it will take to get there.
Here are a few combinations to give you an idea of the time frame you're looking at.
| Monthly Contribution | Starting Balance | Annual Return | Years to $1 Million |
|---|---|---|---|
| $500 | $0 | 10% | 28.8 years |
| $500 | $0 | 12% | 25.5 years |
| $500 | $25,000 | 10% | 25.3 years |
| $500 | $25,000 | 12% | 22.1 years |
| $750 | $25,000 | 10% | 22.6 years |
| $750 | $25,000 | 12% | 19.9 years |
Source: author calculations.
Obviously, the more you start with and the better return you receive, the shorter the time until you hit the million mark. But a couple of things stand out when looking at the table above.
- Even in a scenario where you earn a strong return and do a diligent job of saving, you're still looking at around 20 years of disciplined and consistent savings. Saving $1 million isn't easy; be prepared for it to take a while to get there.
- On the other hand, even if you start with nothing and earn a more modest long-term return, your goal is still in sight. If you're able to start early enough, there's plenty of time for compounding to do its thing.
In other words, no matter where you start, a $1 million portfolio is within reach.
Why VIG's portfolio can get you to $1 million
The Vanguard Dividend Appreciation ETF could be considered a modestly more aggressive dividend ETF. The requirement of at least 10 years of consecutive annual dividend growth helps ensure that the companies in the fund are durable cash-flow generators that have already committed to their dividends.
But the market-cap-weighting strategy means that the biggest companies get the biggest allocations regardless of their yields or how long they've been paying dividends. The fund's top three holdings -- Broadcom, Apple, and Microsoft -- alone account for 13% of the portfolio, which is proof of that.
But that can still be a good thing for long-term investors. The growth tilt should give the Vanguard Dividend Appreciation ETF more long-term upside than a traditional dividend ETF. Even though it's not the best pure income vehicle, the fund's sector composition is well-suited to helping investors reach the $1 million mark through share price appreciation alone.
For investors seeking a $1 million portfolio, this ETF is a great vehicle for getting there.
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David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Broadcom, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
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