The tech sector and the artificial intelligence (AI) trade continue to push U.S. stock prices to record highs. The S&P 500 is on pace for its fourth consecutive year of double-digit gains. AI-fueled earnings growth has been strong over the past year. What’s not to like?
Actually, there are a few things. Inflation is back above 4% thanks to surging oil prices and the war in Iran. Consumer spending fatigue and sentiment have gotten worse. Gross domestic product growth is slowing. There are legitimate reasons to think that there’s some real underappreciated market risk looming.
That’s why I think the next fund to own now is not the Vanguard S&P 500 ETF (VOO +1.86%) or the Vanguard Information Technology ETF (VGT +3.25%). It’s the more defensive, income-focused Vanguard Dividend Appreciation ETF (VIG +0.79%).
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Why VIG has the right portfolio construction
This exchange-traded fund tracks the S&P U.S. Dividend Growers index, which screens for stocks that have raised their annual dividends for at least 10 consecutive years. It doesn’t have any requirements for balance sheet health or yield. But companies that are consistently paying dividends and have committed to growing them for years are usually in a good financial position.
The one thing I find interesting about the Vanguard Dividend Appreciation ETF is that it’s weighted by market capitalization instead of by any dividend-related measure. That means the biggest companies get the biggest weights, regardless of their yield or how long they’ve been making dividend payments.
Vanguard Dividend Appreciation ETF
Today’s Change
(0.79%) $1.87
Current Price
$237.60
Key Data Points
Day’s Range
$236.77 – $237.62
52wk Range
$198.37 – $237.62
Volume
7.5K
That’s how you get Broadcom, Apple, and Microsoft as the top three holdings. It also helps explain why the fund as a whole only has a dividend yield of 1.5%.
But that actually produces a unique portfolio with elements of both income and growth. The regularly increasing dividend payments help offset some of the effects of inflation, while the tech-heavier allocation (25% of assets are currently invested in tech stocks) ensures exposure to any further AI-fueled rallies.
Why VIG is an ETF to buy now
With tech earnings growth looking solid for the remainder of this year and 2027, there’s every reason to believe that this sector could continue leading and pushing the market higher. Any dividend ETF that overweights tech relative to its peers is able to tilt more conservative, but not too conservative. That could prove the place to be, given that valuations are still a concern.
With the Fed looking like it could hike before the end of the year, duration-sensitive equities might be under some pressure. This fund’s double-digit allocation to both healthcare and consumer staples is likely to provide support if rates keep moving higher.
The Vanguard Dividend Appreciation ETF may not be a huge income generator, but its balanced portfolio allocation could be the sweet spot for the rest of this year.
David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Broadcom, Microsoft, Vanguard Dividend Appreciation ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
