When you’re just starting out, I firmly believe you should focus on owning quality companies, not necessarily undervalued ones. Why?
Because you’re likely to experience at least one market correction—if not more—along the way. Owning solid blue-chip companies can make those moments far more reassuring, both mentally and financially.
If you’re unsure how to identify what makes a company “quality,” that’s okay. You don’t need to know all the financial ratios just yet. A simple and effective shortcut is to look for companies with a history of consecutive years of dividend growth.
This works because consistent dividend growth is a strong proxy for quality—it often signals a company with solid cash flow, a durable business model, and disciplined management.
If the idea of screening for dividend growers manually sounds hard, don’t worry. You can delegate this task to two unique exchange-traded funds (ETFs) from Vanguard and iShares, designed specifically to focus on American and Canadian dividend-growth stocks.
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Vanguard U.S. Dividend Appreciation Index ETF
First up is Vanguard U.S. Dividend Appreciation Index ETF (TSX:VGG).
This ETF tracks S&P U.S. Dividend Growers Index, which includes a couple of hundred stocks with a minimum requirement of 10 consecutive years of dividend growth. It charges a modest management expense ratio (MER) of 0.30%.
While its current yield of 1.25% might not grab your attention, remember that ETFs like this are built for total returns and long-term compounding rather than immediate income.
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF
A great complement to VGG is iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ).
CDZ employs a similar strategy, but it focuses on the Canadian market. Unlike VGG, it only requires stocks to have a five-year streak of consecutive dividend growth.
While its MER of 0.66% is higher than VGG’s, CDZ offers two key benefits: a higher yield of 3.56% and monthly payouts instead of quarterly ones.
Putting it together
If you had invested $10,000 in a 50/50 allocation between VGG and CFZ from August 12, 2013, to November 20, 2024, your investment would have compounded at an annualized rate of 11.57% with dividends reinvested.
By the end of that period, your original $10,000 would have grown to $34,351.12—more than tripling in value with no work needed from you.
Both ETFs are fantastic for owning quality companies with a track record of growing their dividends. Over time, the “snowball effect” of dividend growth and reinvestment can work wonders.
Here’s how it works: as these companies increase their dividends, you can reinvest those payouts to buy more shares. These additional shares then generate even more dividends, which can be reinvested again.
Over the years, this compounding effect accelerates, creating a powerful growth engine for your portfolio. It’s a simple yet effective strategy for building wealth and securing a lifetime of financial security.
