Motley Fool: Blue-chip dividends and growth
The Vanguard Dividend Appreciation ETF (ticker: VIG) is chock-full of blue-chip companies. It aims to roughly duplicate the performance of the S&P U.S. Dividend Growers Index – which features companies with at least 10 consecutive years of dividend increases – by holding most or all of the same companies. (The index also excludes the topyielding quarter of eligible stocks to avoid yield traps – situations where a stock has a high dividend yield simply because its stock price has fallen, often for not-so-good reasons.)
It’s a weighted index, meaning that certain stocks make up more of the assets than others, and there were 337 stocks altogether as of Sept. 30. The top five holdings then were: Broadcom, Microsoft, JPMorgan Chase, Apple and Eli Lilly.
The ETF’s recent dividend yield of 1.6% may seem small, but remember that the per-share payout should grow over time. The most recent quarterly payout was $0.865 per share, and a decade earlier, it was $0.443. Top holding Broadcom recently offered a dividend yield of 0.6%, but it has increased its payout by 82% over the past five years alone.
Another bonus – this fund has an extremely low fee. Its expense ratio of 0.05% means that for every $10,000 you have invested, you’ll pay only $5 per year. (The Motley Fool owns shares of and recommends the Vanguard Dividend Appreciation ETF.)
Ask the fool
Q. What’s an ETF? – K.Y., Tulsa, Oklahoma
A. It’s an exchange-traded fund – a grouping of stocks, bonds and/or other securities very much like a mutual fund. Unlike a mutual fund, it trades like a stock throughout each trading day on a stock exchange. We’re big fans of many low-fee index-fund ETFs, such as ones that track the S&P 500 or dividend-focused indexes.
Q. What’s a “naked call” option? – L.D., Lancaster, Pennsylvania
A. First, understand that options can be tricky and risky, and you can build wealth successfully in the stock market without ever using them. But on to naked calls: There are two main kinds of options – calls and puts. Buying a call gives you the right to buy a certain number of shares at a certain “strike” price within a defined period of time (often just a few months). Buying a put, conversely, gives you the right to sell shares.
When you sell (or “write”) a call, you’re committing to deliver a set number of shares if the buyer exercises the call. If you own the shares, it’s a “covered call.” If you don’t, it’s a “naked call.” Naked calls are riskier because should the stock surge, you may have to fulfill your contractual obligation by buying the shares at the new, higher stock price to deliver to your buyer. You can lose a lot of money if things don’t go the way you thought they would. But if the stock stays below the strike price until the option expires, you get to pocket the price of the option. If you’re intrigued by options, read and learn a lot more about them before you trade any.
My smartest investment
My smartest investing move? It was investing in the stock market. – N.K., online
The Fool Responds: That’s a smart move indeed – particularly for building wealth over the long term. Over many decades, the U.S. stock market (as represented by the S&P 500 index of 500 of America’s biggest companies) has delivered average annual returns of close to 10% when dividends are included. For best results, remember that the dollars invested earliest are the most powerful, as they have the most time in which to grow. So start early, invest more money regularly and be patient. An easy way to invest in the whole U.S. stock market is via an index fund such as the Vanguard Total Stock Market ETF (VTI).
Keep a proper perspective, too: Sometimes the stock market will decline a little or a lot, but it has always eventually recovered and gone on to new highs. It might average annual gains above or below your expectations over your particular investing period. And your investment might be worth less than you paid at some point, especially in your first months. Take time to learn more about stock investing to get more comfortable with and confident about it.
Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@ fool.com.