Billionaire Warren Buffett is famous for his skill at picking individual stocks. His returns have been phenomenal, trouncing the wider market averages over the past several decades.
But choosing individual stocks like his favorites (such as Apple (NASDAQ: AAPL) and Coca-Cola (NYSE: KO)) is not what Buffett recommends for most investors. Rather, the Oracle of Omaha believes you'd be much better off putting your money in a low-cost fund that seeks to replicate the returns from an index like the S&P 500. That way, your gains will beat the vast majority of professionals on Wall Street, with very little effort on your part.
With that goal in mind, let's look at an exchange-traded fund (ETF) that meets Buffett's criteria. Here's why the Vanguard Dividend Appreciation ETF (VIG 0.38%) deserves a spot in your long-term investment portfolio.
Why Buffett would love this ETF
The Vanguard Dividend Appreciation ETF tracks the performance of a large subset of S&P 500 stocks -- specifically, those that have a record of growing their dividends each year. Buffett would likely love this fund for a few key reasons.
- The fund is passively managed, keeping costs extremely low.
- It owns hundreds of large, established businesses within the S&P 500.
- Most of its holdings pay a growing dividend.
Let's start with the fact that the ETF is a passively managed index fund, meaning it does not employ expensive portfolio managers. That approach results in low costs, with just $6 charged to investors annually per $10,000 invested. Similar funds that use portfolio managers have fees that are many multiples of that rate -- upwards of $79 on average. In Buffett's 2013 letter to Berkshire Hathaway (NYSE: BRK.B) (NYSE: BRK.A) shareholders, he extolled the value of a "very low-cost" index fund, and this one certainly fits that description.
The Vanguard Dividend Appreciation fund is anchored in the S&P 500, with its top holdings including cherished Buffett gems like Apple and Coca-Cola. The financial sector is its biggest concentration, but investors get exposure to just about every other industry through this fund as well. It is run by Vanguard, too, which Buffett has called out as a trustworthy financial brand.
Dividend growth is powerful
Finally, there's the fact that this ETF is focused on dividend payers whose payouts are rising. Buffett has talked up dividends consistently in his annual letter to Berkshire shareholders, including last year when he explained how they are part of the "secret sauce" that's made his portfolio's returns so stellar over the years.
Dividend growth at Coca-Cola, for instance, has lifted Berkshire's annual income from that one holding to $704 million per year from $75 million back when Buffett concluded his purchases of the beverage giant several decades ago. "All Charlie [Munger] and I were required to do was cash Coke's quarterly dividend checks," Buffett said. Coke shares are included in this ETF, along with roughly 300 other quality dividend stocks.
Mimic Buffett's approach
Investors can't expect to repeat Buffett's amazing returns going forward, even with the perfect ETF. But you can maximize your chances at strong growth by taking a page out of his investing playbook.
Specifically, buy high-quality companies that have a good track record of increasing their earnings over time. Hold these stocks for many years (or decades), and you've got the ingredients you need to make the most out of your portfolio. The Vanguard Dividend Appreciation ETF is one great financial tool you can use to help you along in that investing journey.
