Want decades of passive income? Buy this index fund and hold it forever.
Dividends can get a bad rap. Some assume they are for retirees who need the income to pay the bills. Others believe that companies that pay dividends do not offer significant growth prospects and are not the right investments for people who want to make a lot of money in the stock market.
Well, that couldn’t be further from the truth.
Dividends should delight investors. Companies usually pay them because they make so much profit that they can share it with shareholders. Some dividend stocks have high yields and offer little growth. Yes, it could be ideal for income-focused investors like retirees. However, there are also dividend growth stocks — companies with growing earnings and profitable businesses that allow them to regularly increase payouts.
Many of the best performing stocks pay out over the long term and increase their dividends year after year. And you don’t have to separate them yourself – they exist index funds who do it for you.
The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) is a premium index fund focused on investing in dividend growth. Follow S&P US Dividend Producer Index and holds 337 companies.
Buy it, hold it and enjoy (increasing) passive income for life. Here’s what you need to know.
Investing forever is not easy. Few investments deserve permanent spots in the portfolio, but it’s hard to go wrong with Vanguard if you’re looking for buy-and-hold index funds. It is one of the oldest and most trusted mutual fund companies.
Vanguard has been around since the mid-1970s. Its founder, John Boglehe was among the pioneers of passive investment strategies for individual investors. Today it is considered the world’s largest mutual fund.
My favorite thing about Vanguard is its ownership structure. Ownership is spread across the company’s funds, so technically, the people who own Vanguard are the same people who buy and hold the funds. This minimizes conflicts of interest.
The fundamental appeal behind dividend growth investing is that these companies will pay and grow their dividends over time. This means your passive income continues to grow, and you can increase the compounding effect by reinvesting dividends to buy new shares.
The initial yield of the Vanguard Dividend Appreciation ETF is just 1.7%. This might not blow your mind, but the ETF’s quarterly dividend is up nearly 800% since 2006:
The ETF’s compounded earnings growth rate is around 12%, so assuming the dividend grows at that rate, investors can expect the amount to double every six years on average. Letting a position marinate for a few decades can lead to a lot of passive income.