Top 3 dividend growth funds to invest in 2023


When it comes to investing in the stock market, there are many options available to investors. We can invest in single stock names in the hopes of massive appreciation on the value of our investments, or steadier, low volatility companies that generate consistent and reliable dividends over time, adding another revenue stream for us in the form of passive income.

For investors who are looking for steady income from their investments, dividend growth funds can be a great choice. So, what exactly is a dividend growth fund?

These are a grouping of stocks that have been formed into a basket, or fund, and have been selected primarily due to their consistent track record of both paying dividends over time and growing the amount that they pay out.

For most investors, we don’t have the time (or desire) to choose which individual companies to invest in, so rather than researching company financials ourselves, spending countless hours doing due diligence, we can invest in these funds to give us access to dividend paying stocks across multiple industries and regions with a growing income over time.

This article explores three popular dividend growth funds, the types of companies these funds are invested in, their current dividend yield and most importantly, how much that dividend has grown over time.

As a dividend growth fund, the main attraction is not the yield today, but how much that pay out can grow in the future, giving us as investors a larger and larger income stream the longer we are invested.

Now I must caveat this by saying that this is not financial advice and purely my own thoughts. I would always advise doing your own due diligence before investing your own money.

Vanguard Dividend Appreciation Fund – $VIG

First on the list is the Vanguard Dividend Appreciation Fund, ticker symbol VIG. The purpose of VIG is to invest in companies that have a history of increasing their dividends for at least 10 consecutive years, and as a result, the portfolio comprises of around 200 stocks.

This is incredibly diverse, so investors are not exposed greatly to any single company names, and if a company fails to meet the funds requirements, it can be sold and replaced with others that do. This is one of the great benefits of rules-based funds, they are self-cleansing and provide investors with a ‘set it and forget it’ strategy.

Some of the top holdings include Procter & Gamble, Johnson & Johnson and Coca-Cola, but here is a list of the top 10 holdings for you to see.

VIG has had an average annual return of 13.50% and currently yields a dividend of 1.93%. What is more impressive is the consistent track record for dividend growth over the years.

If we look back 10 years ago, what was previously an annual dividend of $1.39 has steadily grown to $2.97 at the end of 2022, with further growth ahead. This represents a compound annual growth rate of 8.83%.

VIG pays out dividends quarterly, typically in March, June, September and December. What I personally love about Vanguard funds is the unbeatable low cost of management fees. With an expense ratio of just 0.06%, it is one of the lowest cost funds to invest in globally.

Schwab US Dividend Equity ETF – $SCHD

SCHD invests in dividend-paying stocks from the US and focuses on those included in the Dow Jones U.S Dividend 100 Index. These stocks have a history of consistent and reliable dividend payments, and SCHD is no exception, with the fund providing 10 years of consecutive dividend growth. With a current dividend yield of 3.39%, it is also the highest yielding on this list, providing an excellent entry point to grow a dividend income stream.

Some of the top holdings of the fund include the likes of JP Morgan, PepsiCo and Visa, but here is a list of the top 10 for you to see.

Not only do these stocks provide reliable dividends that grow over time, but they have also allowed the fund to drastically outperform its peers, with a 10-year compound annual growth rate of 12.2%!

To put this into perspective, if you were to invest in SCHD in 2013, you would have received an annual dividend of $0.90 per share. Fast forward to 2022 and the fund paid out an annual dividend of $2.56, a massive increase over that period.

Not only has the fund provided immense gains in the form of dividend growth but investing over a 10-year period would have resulted in a 150% appreciation in your investment. Accounting for dividend reinvestment, the fund has grown by 13.14% annually over the past 10 years, an immense return that few funds can match.

Like VIG, Schwab’s US Dividend Equity ETF has an expense ratio of only 0.06%, making it an invaluable, low-cost addition to any dividend portfolio.

While earning dividends and watching your passive income grow over time is great, with interest rates rising significantly, we can now also earn a return on our cash!

Rather than increasing our risk exposure, we can gain a return at a risk-free rate on uninvested cash, and todays sponsor Interactive Brokers is offering up to 4.07% interest on uninvested cash if held in their accounts, which is an incredible return for no risk exposure.

If you want to know more about how to set up an account with them and start to earn a return on the cash element of your portfolio, click here. Signing up to an account using the link will also help support us.

Vanguard Dividend Growth Fund – $VDIGX

This fund aims to provide a combination of capital appreciation and income by investing in dividend-paying stocks with the potential for growth in both dividends and earnings. Over a 10-year period, the fund has provided a total cumulative return of 209%.

With a portfolio of around 50 – 70 stocks as a usual estimate, the fund currently holds less, with only 41 stocks as of this video.

Some of the top holdings include Nike, McDonalds and UnitedHealth, focusing predominantly on large cap companies with a blend between value and growth. Over the last 10 years, the fund has had an average annual return of 12.03%, outpacing the S&P500.

The fund currently has a dividend yield of 1.7%, and this has grown at an annualized rate of 8.49% over the past 5 years, meaning that our dividend income would have significantly outpaced inflation if we were invested here.

As an actively managed fund it carries an expense ratio of 0.27%, which is higher than an index fund, but is a relatively cheap actively managed fund as Vanguard funds tend to be.

Expense ratios are one thing to consider when investing, as although the difference may appear small, they can eat into our returns significantly over a long period of time.

They’re also one of the reasons why actively managed funds tend to underperform passive index funds over a long period of time. If you want to know more about this topic, click here.

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