The Smartest Dividend Stock ETF to Buy With $2,000 Right Now

If you have a couple thousand dollars to invest and want a set-it-and-forget-it dividend investment, there are some excellent choices in the market. Most investors who want dividend exchange-traded funds (ETFs) look for higher-yielding ETFs, which can certainly be a valid way to go, especially if you're retired and rely on your dividends to pay your bills. But there are some that might seem like they are low-paying investments that you might want to put on your radar.

If you don't completely rely on your portfolio to provide current income for your day-to-day expenses, it's important not to overlook ETFs that have a below-average dividend yield but excellent total return and future income potential. And that's exactly why the low-cost Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) could be worth a closer look right now.

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The Vanguard Dividend Appreciation ETF in a nutshell

The short explanation is that the Vanguard Dividend Appreciation ETF is an index fund that tracks an index of large-cap stocks with a strong track record of growing their dividends every year. There are currently 338 stocks in the portfolio, and the two largest sectors represented in the index are technology and financials. It's also worth noting that this is a weighted index, which means that larger companies have more influence on performance.

To give you an idea of the types of companies you'll find, here are the fund's five largest holdings as of the latest available data:

Data source: Vanguard/CNBC/Company websites. Dividend yields as of Jan. 6, 2025.

Here's the key takeaway: These companies may not pay huge dividends now, but they all have excellent growth potential within their businesses that should enable them to pay out significantly more money in the future. Consider that Apple's dividend has increased by 113% over the past decade, and that is the lowest growth rate out of the five stocks in the chart. JPMorgan Chase's dividend has more than tripled in a decade, and UnitedHealth's payout has increased more than fivefold.

The point is that if you plan to rely on your stock portfolio for income at some point, but still have years until that point arrives, dividend appreciation could be the right thing to focus on.

Growing income plus upside potential can be a winning combination

Consider this: Over the past 10 years, the Vanguard High Dividend Yield ETF (NYSEMKT: VYM), which has a much higher current yield, has produced an annualized total return of about 9.8%. The Vanguard Dividend Appreciation ETF has compounded investors' money at a rate of 11.4% over the same period as the stocks it owns tend to be less mature and have more upside potential over time.

While this might not sound like a huge difference in performance, here's how it can impact the growth of a $10,000 investment over time.

Data source: Author's own calculations.

Of course, this past performance doesn't guarantee future returns will be the same. Plus, it's important to emphasize that the Vanguard Dividend Appreciation ETF might not be appropriate for investors who are at or near retirement and derive much of their income from their portfolio. But the point is that if you measure your returns in decades and have time to let your income stream grow, focusing on dividend growth stocks instead of current yield could be a smart strategy.

Should you invest $1,000 in Vanguard Dividend Appreciation ETF right now?

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JPMorgan Chase is an advertising partner of Motley Fool Money. Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, Microsoft, Vanguard Dividend Appreciation ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom and UnitedHealth Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.