VIG: A Growth Fund Disguised As A Dividend ETF

The Vanguard Dividend Appreciation ETF (VIG) has long been marketed as a vehicle for income-focused investors, targeting companies with a decade-long track record of dividend increases. Yet, a closer examination of its performance and portfolio dynamics reveals a more nuanced story: VIG is not merely a dividend ETF but a growth-oriented fund in disguise. By reassessing dividend yield as a proxy for growth, this analysis argues that VIG's true value lies in its exposure to high-quality, earnings-driven companies that prioritize long-term reinvestment over short-term payouts.

The Illusion of Dividend-Centricity

VIG's 1.65% forward dividend yield as of August 2025, according to Vanguard's fund page, might suggest a modest income stream. However, its historical performance tells a different tale. From 2020 to 2025, VIG delivered a 12.21% compound annual growth rate (CAGR), outpacing the S&P 500's average returns during the same period, according to FinanceCharts.com. This outperformance was not accidental. The ETF's focus on companies with at least 10 years of consecutive dividend growth-such as Microsoft, Johnson & Johnson, and Procter & Gamble-has created a portfolio of firms with strong balance sheets, resilient cash flows, and a history of reinvesting profits into innovation and market expansion, per Morningstar.

For example, VIG's 3-year annualized return of 14.5%, as reported on Vanguard's fund page, contrasts sharply with the 9.52% annualized return of the Vanguard High Dividend Yield ETF (VYM), according to Vanguard's VYM factsheet. While VYM's 2.86% yield appeals to income seekers, its exposure to volatile sectors like energy and financials has led to higher volatility, as seen during the 2022 market selloff. VIG, by contrast, weathered the downturn with a -9.80% total return in 2022 (FinanceCharts.com), compared to VYM's steeper decline, and rebounded strongly in 2023 and 2024.

Earnings Growth: The Hidden Engine

The key to VIG's growth-oriented profile lies in the earnings trajectories of its constituent companies. Though direct data on average revenue and earnings growth for the 2020–2025 period is sparse, indirect evidence is compelling. The S&P U.S. Dividend Growers Index, which VIG tracks, has seen its members grow dividends at a 6.46% CAGR from 2006 to 2025, according to the S&P U.S. Dividend Growers Index. Sustained dividend increases typically require robust earnings growth, as companies must generate sufficient profits to fund payouts while reinvesting in operations.

Moreover, VIG's portfolio companies have demonstrated an 11.3% annual earnings growth rate over the past five years, according to FactSet data, a metric that directly correlates with the ETF's ability to compound value. This focus on earnings quality, rather than yield alone, explains why VIG has delivered a 13.97% 3-year CAGR (FinanceCharts.com), even as interest rates rose and bond yields competed for investor attention.

Dividend Yield as a Misleading Proxy

Traditional equity portfolios often treat dividend yield as a proxy for growth, assuming that high yields signal strong cash flows and mature, stable businesses. However, this logic falters in modern markets. High-yield stocks can be value traps-firms with declining earnings propping up payouts through debt or asset sales. VIG's exclusion of such companies, in favor of those with consistent earnings growth and disciplined capital allocation, underscores its divergence from this outdated framework.

Consider the ETF's performance during the 2023–2024 recovery. While VYM benefited from energy sector outperformance (Vanguard's VYM factsheet), VIG's gains were driven by technology and healthcare stocks, which prioritized innovation and market share expansion. This strategic tilt aligns with long-term growth, even if it means forgoing higher current yields.

Conclusion: A Dual-Objective Fund for Modern Portfolios

VIG's blend of income and growth makes it a unique offering in today's market. By focusing on companies that balance dividend increases with earnings reinvestment, it bridges the gap between traditional income strategies and growth-oriented equity investing. For investors seeking to avoid the volatility of high-yield traps while still benefiting from compounding returns, VIG offers a compelling solution.

As the line between income and growth blurs in an era of rising interest rates and shifting market dynamics, funds like VIG will likely play a central role in modern portfolios. The ETF's performance from 2020 to 2025 demonstrates that dividend yield is not the sole-or even primary-driver of growth. Instead, it is the underlying earnings strength of its constituents that propels VIG forward, making it less a dividend ETF and more a growth fund in disguise.