The Best Dividend ETF to Buy as Washington Stalls

Even though we’ve been through this before, the U.S. government shutdown can be an unsettling time. Swaths of federal employees are off the job — or still working but not being paid — and it’s unclear how long the deadlock will last.

At the same time, it’s scary for non-government workers, too. We rely on the government for Social Security checks, Medicare, Medicaid, veterans’ benefits, and for much-needed services such as air traffic control.

People will still get their checks and veterans’ benefits, but some services will be delayed. And travelers are already reporting delays and cancelled flights at airports.

Fortunately, the stock market has a history of holding its own during a government shutdown. Keeping your money in the market has traditionally been a smart move. And if you’re worried about making sure you have a steady flow of income, a dividend exchange-traded fund (ETF) like the Vanguard Dividend Appreciation ETF (VIG -1.92%) can be a good option.

Image source: Getty Images.

About the Vanguard ETF

First, it’s important to understand why the Vanguard Dividend Appreciation ETF includes the stocks it does. And to do that, you have to understand the principles of the underlying index, which is the Nasdaq US Dividend Achievers Select Index.

This index includes companies that are on the Nasdaq US Broad Dividend Achievers Index, with some important exceptions. First, it excludes the top 25% of companies in the index by dividend yield. That’s to make sure the Nasdaq US Dividend Achievers Select Index doesn’t have unstable companies with dividends that are artificially high because their businesses are unstable.

And second, the fund excludes all master limited partnerships and real estate investment trusts. Lastly, it only includes companies that have increased their dividend annually for at least 10 consecutive years.

The stocks left make up the Nasdaq US Dividend Achievers Select Index, and those names are skewed toward the technology, industrial, and financial sectors, which account for a collective 64% of the fund.

That’s the index that the Vanguard ETF strives to duplicate, so you can find the same breakdown by stock and sector in it. The top 10 holdings are all blue chip names, with no stock having more than a 6% weighting.

Source: Morningstar

Only two of these companies in the Vanguard Dividend Appreciation ETF’s top 10 are in the red after 12 months. That’s the beauty of an ETF: Rather than trying to guess the one or two best stocks to buy, you get an entire bushel of them with the Vanguard ETF.

The other thing I really like about this ETF is that it gives you a good mix of performance and yield. Compared to some other popular dividend ETFs, it provides the best one-year performance, with a gain of 10%. Combine that with a dividend yield of 1.6%, and you get a nice total return from Vanguard Dividend Appreciation.

VIG data by YCharts.

The bottom line

Yes, this can be an unsettling time, and it’s only natural to make sure that you’re investing in a fund that can provide you with some guaranteed quarterly income, especially if you’re worried that you’re going to have to cover a shortfall by another source.

The Vanguard Divided Appreciation ETF provides the best combination of dividend payout and one-year performance. And when you also consider that it has a low expense ratio of only 0.05%, or $5 annually per $10,000 invested, then I’m comfortable parking funds here while waiting for the government to restart.