Nobody knows when the next stock market crash will happen. It could be next week. It could be years from now. But I know what I’d want to buy if it happened.
The Vanguard Dividend Appreciation ETF (VIG -0.05%) is a portfolio of high-quality companies that generate big cash flow and demonstrate a history of paying and growing dividends over time.
But that’s not the biggest selling point in a down market. It provides the combination of growth and income that helps cushion against downside risk when weaker companies are getting hit hard, yet maintains a more growth-oriented profile that should capitalize on an eventual recovery.
In a sense, it potentially allows you to take advantage of both the crash and the rebound.
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In this case, VIG isn’t really a dividend story
The Vanguard Dividend Appreciation ETF tracks an index that requires companies to have grown their annual dividend for at least 10 consecutive years. It eliminates the highest-yielding stocks right off the bat, helping to avoid companies that could be signaling financial trouble.
That last piece effectively serves as a quality screen for the fund, which is incredibly important during crashes. In volatile markets, investors often turn to safer, more durable stocks that can withstand tough environments. The dividend growth requirement and high yield elimination essentially help create a portfolio of those very stocks.
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The fund’s portfolio is a bit unique for a dividend ETF. Technology accounts for around 25% of the portfolio, which is one of the highest allocations in this category. While that could increase volatility, I’d point out that half of that allocation goes to Broadcom, Microsoft, and Apple. Those are three heavyweight tech companies with huge revenue streams that should be able to hold up. These aren’t speculative growth names.
The additional sector weightings to financials (22%) and healthcare (18%) provide an attractive combination for an eventual recovery, quality companies with meaningful exposure to economically sensitive areas of the market.
The Vanguard Dividend Appreciation ETF will almost certainly fall in the next market crash. Investing in this fund isn’t meant to be a way to avoid it altogether. But it’s got durability, balance sheet strength, cash flows, and an improving income stream. These are the kinds of companies that are built for down markets.
It gives investors a quality tilt that plays well in down markets while positioning them well when stocks eventually begin turning higher again.
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.
