3 Consistent Dividend Appreciation ETFs Investors Are Largely Ignoring, But They Shouldn’t

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Dividend appreciation is one of the key factors that separates equities from many fixed income products out there. Sure, there are some products that pay out increasing amounts over time (such as annuities and other structured products). But for investors holding more traditional portfolios consisting of a mix of stocks and bonds, the bond portion of one's portfolio is typically fixed or fluctuates alongside interest rate movements over time.

Quick Read

VIG holds only 300 stocks with a decade of consecutive annual dividend increases and charges 0.05%. DGRO requires five years of dividend growth instead of ten and yields 2% versus VIG’s 1.6%. VIGI offers international dividend growers at lower valuations than U.S. stocks with a 1.9% yield. A recent study identified one single habit that doubled Americans’ retirement savings and moved retirement from dream, to reality. Read more here.

In contrast, investing in dividend-paying stocks with a track record of raising their dividend distributions over time can provide passive income streams with inflation protection. That's to say nothing of the superior capital appreciation upside equities provide over fixed income (though, there can be a component at play for bond funds as well).

With that in mind, for investors looking for meaningful dividend appreciation over time, here are three top exchange traded funds (ETFs) I think shouldn't be ignored right now.

Vanguard Dividend Appreciation ETF (VIG)

Vanguard happens to be one of my top ETF providers I look to for options in any theme. For those looking for dividend appreciation, the aptly-named Vanguard Dividend Appreciation ETF (VIG) is where my mind immediately goes first.

This fund screens out the vast majority of top stocks in the market, only holding around 300 stocks which are heavily tilted to quality large-caps. Providing exposure to a range of sectors including consumer defensive stocks, industrials and healthcare names (among others), VIG is an ETF aimed at investors looking for consistent dividend growth over time.

That's because the holdings within this fund have to meet a key criterium - having raised their dividends for more than a decade straight (on an annual basis). These are companies that typically come with durable competitive advantages and pricing power, able to earn outsized cash flow growth over time that's ultimately passed onto investors in the form of higher dividends.

With an expense ratio of 0.05% (about as low as it gets), this is a top dividend appreciation ETF I think most long-term investors can sleep well at night owning.

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iShares Core U.S. Dividend Growth ETF (DGRO)

Tracking the Morningstar U.S. Dividend Growth Index, an index of more than 400 dividend-paying stocks in the mid-cap and large-cap realm, the iShares Core Dividend Growth ETF (DGRO) is another top option for investors looking for consistent dividend growth over time.

Now, the criteria DGRO places on the number of stocks that can be held in its fund is slightly looser - requiring five years of dividend increases to be included. That's one of the reasons why this ETF has a more expansive portfolio, and a slightly higher yield when compared to VIG (2% versus 1.6%, respectively).

So, for investors looking for a bit more up-front yield and companies that trade at relatively attractive valuation multiples (the average for this ETF is around 20-times forward earnings), this is an excellent long-term option to consider at an expense ratio of just 0.08%.

Vanguard International Dividend Appreciation ETF (VIGI)

Similar to the first pick on this list, the Vanguard International Dividend Appreciation ETF (VIGI) is another great option for investors looking for true long-term dividend growth stocks.

The fund's expense ratio of 0.1% is the highest on this list, but that's because VIGI focuses on holding international stocks, which can be less liquid and harder to rotate in and out of. In my view, the ETF's 1.9% dividend yield and much more attractive valuation multiple compared to most U.S.-based ETFs makes this ETF one to consider.

International stocks in other developed markets, and emerging markets as well, tend to have much lower multiples than what we're used to at home. Some of that has to do with a quality perception, with other market-related risks higher outside of the U.S.

But for those willing to bear those risks, and view international stocks as comparatively cheap (as I do), VIGI and its notable dividend appreciation upside is one fund I think is worth considering here.

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