Some active exchange-traded funds have overly complicated models and high turnover rates, but Morningstar's Sonya Morris highlights another approach with the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG). This is a dividend-oriented fund that tracks the Mergent Dividend Achievers Select Index, a market-cap-weighted index of firms that have increased their dividends in each of the last 10 years.
But Vanguard goes a step further by developing quantitative screens that are applied to the benchmark to identify those companies that are most likely to continue to grow dividends over time. For example, recently it tossed out names such as Citigroup (NYSE:C), Pfizer (NYSE:PFE), and Chevron (NYSE:CVX) because the model indicated that these companies may not be able to increase their payouts as time goes on.
Morningstar goes on to base its recommendation on the reasoning that companies that have the financial resources to grow their dividends for 10 straight years are generally solid franchises, so it's not surprising that this fund dedicates almost 70% of its portfolio to stocks with strong balance sheets and a competitive edge. Dividend growth is an excellent sign of financial health, and this fund's portfolio has a cumulative return on equity higher than most competing ETFs.
The WisdomTree family of ETFs also has the bulk of its ETFs selected and weighted by their cash dividend records and is another alternative for ETF investors on the hunt for yield with quality. Lastly, the Powershares International Dividend Acheivers (NASDAQ:PID) ETF invests in a basket of ADRs that have solid dividend records.