Why Dividend Growth Stocks Beat High-Yielding Stocks

Vanguard Dividend Growth fund yields a so-so 2.2%, but it may be the best way to invest in dividend-paying stocks.

The U.S. stock market, as measured by Standard & Poor's 500-stock index, currently sports a yield of 2.0%. That sure beats the microscopic yields on money-market funds, but it's still not enough for many investors, who have been scurrying after higher-yielding fare. But chasing stocks -- or any other investment -- based upon yield alone is a recipe for disaster. Many bank stocks, for instance, yielded 5% and up before they were crushed during the 2007-09 bear market.

There is a better way to invest in dividend-paying stocks. Consider Vanguard Dividend Growth fund (symbol VDIGX) or some of the stocks it owns. If you prefer exchange-traded funds, check out Vanguard Dividend Appreciation ETF (VIG). It tracks the Dividend Achievers Select index, which holds stocks of companies that have raised their dividends at least ten years running and that are likely to continue hiking their payouts.

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Steven Goldberg
Contributing Columnist, Kiplinger.com
Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.