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Many investors will criticize ETFs because they hold too much. They suffer from di-worsification as many will "put it". Even though I am a big fan of Vanguard's Dividend Appreciation Fund (NYSEARCA:VIG) it does appear that it holds many companies that certainly don't meet the mandate of an investor looking for a combination of growing dividends and decent yield. The fund holds many companies that offer a current yield under 1% and many more with a yield below 2%.

The current yield on total VIG is just above 2% according to Google Finance. That yield in fact is not much more generous than the yield on the broader market S&P 500 (NYSEARCA:SPY), which is 1.9%.

That said, VIG does have a very decent dividend growth rate moving into the recession and coming out of the recession. Dividends were certainly challenged in 2009. Of course investors of all stripes were hit on the income and portfolio value front during the Great Recession. You can read more on the experiences of many Seeking Alpha investors in the comment section of my article Losing It Big Time With Bank of America (NYSE:BAC). That would be me doing the losing on BAC.

We can see that there is very solid dividend growth over time with VIG. Checking in with the Dividend Growth history of the Total VIG holdings we find that VIG increased its quarterly payment from an area of .18 (average of five first dividend distributions) to .32. An increase over that 6½ year period of 80%. That will give us a Dividend CAGR (Compound Annual Growth Rate) of 9.7%.

But what if an investor was more concerned with current yield of the portfolio, that is, they are harvesting the dividends for spending, or perhaps they simply seek more yield to reinvest back into their holdings?

VIG's criteria insists that companies have a history of increasing their dividends over longer periods. Vanguard also applies proprietary value metrics. Those value screens are obviously useful in finding value that translates to total return. In my observation, inclusion in VIG puts a stamp of approval on a company. I did speak with Vanguard, but they ain't talking. Value certainly means finding companies that are attractively priced. The proof is in the puddin' as you might say, Vanguard has outperformed the broader market from inception (May of 2006) by over 1% per year and with slightly lower beta or volatility. It is a great total return vehicle that provides income growth. Here's VIG vs SPY moving through the recession, that's VIG wearing the green jersey.

But what if we boosted that income by stripping out all of those dividend pretenders? Here's the VIG list that only includes companies that have a yield of 2.2% or more.

CompanyYieldMarket CapSector
Maxim Integrated3.658 bTech Manufacturing
McDonald's3.3596 bConsumer
Chevron3.27235 bOil and Gas
Helmerich & Payne3.138 bOil and Gas
Procter & Gamble2.85230 bConsumer
Caterpillar2.854 biIndustrial
Coca-Cola2.77179 bConsumer
Occidental Petroleum2.7675 bOil and Gas Chemical
Pepsi2.73127 bConsumer
Target2.740 bConsumer
Exxon Mobil2.63417 bOil and Gas
Air Products & Chem2.5923 bIndustrial
Aqua America Inc2.584 bWater Wastewater
Emerson Electric2.5647 bGlobal Tech
ONEOK Inc2.5512 bDiversified Energy
Harris Corp2.537 bTech
Partner Re Ltd2.535 bInsurance
Stanley Black & Decker2.4812 bGlobal Manufacturing
General Dynamics2.4732 bAerospace Defense
CH Robinson2.429 bIndustrial Logistics
Praxair Inc.2.437 bIndustrial
RPM international Inc2.45 bChemical Manufacture
MDU Resources Group2.385.6 bNatural Resources
Linear Technology2.3710 bTech
Wal-Mart2.35259 bConsumer
Abbott Laboratories2.3458 bHealth
Norfolk Southern2.3238 bTransportation
Walgreen2.2254 bConsumer
Aflac2.2231 bInsurance
JM Smucker Co2.2211 bConsumer
Genuine Parts2.1512 bAuto Industrial

And here are the smaller caps.

Small Cap
RLI Corp4.552 bInsurance
Erie Indemnity Co3.583.3 bInsurance
South Jersey Industries3.421.8 bEnergy Services
MGE Energy Inc3.021.3 bEnergy
Connecticut Water Serv3.0367 mUtilities
American States Water2.911.1 bUtilities
York Water Co2.82267 mUtilities
Cracker Barrel Old2.792.6 bRetail
SJW Corp2.69546 mUtilities
Brady Corp Class A2.641.5 bManufacturing
Bemis Co Inc2.634 bManufacturing
Owens & Minor Inc2.582.3 bManufacturing
McGrath RentCorp2.48994 mBusiness Rental
Mine Safety Appliances2.491.8 bIndustrial

Vanguard's total holdings of 146 is now down to a list of 45. As we know it doesn't necessarily take a large number of companies to create diversification if we're spread across various sectors. There's enough to choose from. In fact, in a series of articles I played around with VIG by skimming the top ten from VIG's holdings as it appeared to be a great list of stocks in 2012. You can find that article here. It may have been a fluke, but the historical VIG top ten beat the you-know-what out of the total market.

From VIG inception through 2012, and from my top ten exploration the VIG big caps outperformed the broader VIG. I found that trend started to reverse in this article here. Adding 10 more of the (smaller) large caps then provided the needed diversification. Ten was not enough. Twenty did the trick.

So skimming enough of the higher yielders from VIG just might be a way to get that quality stamp of approval and yield in one package. Or you just might get the impetus to do some investigation on a few of the names on this list if you manage your own selections. One theory I explored briefly was that there may be more hidden value in a few of the lesser known names on that list. There are certainly many (mid to small cap) companies on that list that have an impressive total return history. That said, I have no idea if those companies were in VIG in 2007, 2008, 2009 etc. There's survivor bias with respect to this list, that is current VIG holdings. It's also possible that the companies that were stripped out might be the total return champions moving forward. With many seeking and chasing yield (and willing to pay up for it), it's possible and maybe even likely that there's more value in the companies that were excluded? That's certainly a consideration for those seeking total return. For those seeking yield, the important metric is the dividend payments or money in the bank.

All said, I will likely turn into an ETF skimmer one day in order to lower the fees I pay with respect to the ETFs that I hold. And I will likely turn to Vanguard and VIG and ask them to watch my companies for me.

Vanguard, I thank you in advance.

Disclosure: I am long VYM, DIA, SPY, EFA, EWC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dale Roberts aka cranky is a Streetwise Coach at ING Direct Mutual Funds. Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process.

Source: Separating The Yield From The Chaff With Vanguard's VIG