Dividends can get a bad rap. Some assume they are for retirees who need the income to pay their bills. Others believe that companies paying dividends don’t offer meaningful growth prospects and aren’t the right investments for people who want to make a lot of money in the stock market.

Well, that couldn’t be further from the truth.

Dividends should excite investors. Companies usually pay them because they generate so much in profits that they can share them with shareholders. Some dividend stocks sport high yields and offer little growth. Yes, those may be ideal for income-focused investors like retirees. However, there are also dividend-growth stocks — companies with growing earnings and profitable businesses that allow them to regularly increase their payouts.

Many of the best-performing stocks over the long term pay and raise their dividends year after year. And you don’t need to single them out yourself — there are index funds that do it for you.

The Vanguard Dividend Appreciation ETF (VIG -0.07%) is a top-notch index fund focused on dividend-growth investing. It tracks the S&P U.S. Dividend Growers Index and holds 337 companies.

Buy it, hold it, and enjoy a lifetime of (increasing) passive income. Here’s what you need to know.

Backed by a legendary industry name

Investing to hold forever isn’t easy. Few investments deserve permanent spots in a portfolio, but it’s hard to go wrong with Vanguard if you’re searching for index funds to buy and hold. It’s one of the oldest and most trusted investment fund companies.

Vanguard has existed since the mid-1970s. Its founder, John Bogle, was among the pioneers of passive investing strategies for individual investors. Today, it is considered the world’s largest mutual fund company.

My favorite thing about Vanguard is its ownership structure. Ownership is distributed across the company’s funds, so technically speaking, the people who own Vanguard are the same people who buy and hold the funds themselves. This minimizes conflicts of interest.

Passive income with tremendous growth potential

The core appeal behind dividend-growth investing is that these companies will pay and increase their dividends over time. That means your passive income keeps growing, and you can boost the compounding effect by reinvesting your dividends to buy more shares.

The Vanguard Dividend Appreciation ETF’s starting yield is only 1.7%. That might not wow you, but the ETF’s quarterly dividend has grown almost 800% since 2006:

Data by YCharts.

The ETF’s blended earnings growth rate is about 12%, so assuming the dividend rises in lockstep, investors can expect the amount to double every six years on average. Letting a position marinate for a few decades can translate to a lot of passive income.

Double-digit growth also makes the Vanguard Dividend Appreciation ETF a natural choice for almost every investor who wants share price appreciation (capital gains) along with their passive income. The fund had kept pace with the S&P 500 until the past few years, lagging slightly behind due to the latter’s increasing technology exposure.

That leads to one last important point.

The ETF offers genuine diversification

You may hear a lot about diversifying your portfolio across different stocks and industries. As the famous expression goes, you shouldn’t put all your eggs in one basket.

But that’s become difficult as the Magnificent Seven stocks continually grow in weight across many popular funds and indexes. Even the S&P 500 index, which has 500 companies, has about one-third of its value concentrated in just those seven technology stocks!

The Vanguard Dividend Appreciation ETF is only about 25% technology-weighted with just two Magnificent Seven stocks, Apple (5.2%) and Microsoft (3.7%), among its top 10 holdings. This is far more diversification than you’ll find in most growth-oriented funds and indexes.

A diverse base of increasingly profitable companies is arguably the best formula for long-term success without taking on too much risk. That makes the Vanguard Dividend Appreciation ETF stand out from the crowd.