Vanguard Dividend Growth Fund: A Solid Core Holding
Summary VDIGX has low expenses and has outperformed its peers over the years. Don Kilbride looks for stocks that can pay a steady and growing stream of dividends. Vanguard also offers a Dividend Appreciation Index fund which will compete with VDIGX. Overall Objective and Strategy: Growth and Income The Vanguard Dividend Growth Fund (MUTF: VDIGX ) seeks to provide a growing income stream along with long term capital growth by investing in high quality companies that not only pay a dividend, but also have good prospects for growth in both earnings and dividends. Dividend yield is expected to be above the market average, but stocks with very high dividends but no growth are avoided. Stays diversified across all market sectors. Can allocate up to 25% of assets to foreign securities. Benchmark: the NASDAQ U.S. Dividend Achievers Select Index. Fund Expenses The expense ratio for VDIGX is 0.32% which is very low for an actively managed equity fund. Morningstar has computed the average expense ratio of similar funds to be 1.04%, so you pick up over 70 basis points of relative outperformance through lower expenses alone. Vanguard does not offer a lower cost Admiral share class for this fund. Vanguard does offer a passively managed index fund with similar goals to VDIGX – the Vanguard Dividend Appreciation Index Fund (MUTF: VDADX ) which requires a $10,000 minimum investment with an expense ratio of only 0.10%. VDADX is weighted more to mega-cap companies and has a higher allocation to the Consumer Staples sector than VDIGX. Minimum Investment VDIGX has a minimum initial investment of $3,000. Past Performance VDIGX is classified by Morningstar in the “Large Blend” or LB category. Compared with other mutual funds in this category, VDIGX has performed quite well, largely because of its low expenses and consistent stock selection. These are the annual performance figures computed by Morningstar since inception in December 2013 (as of September 14, 2015). Investors who compare their performance to the S&P 500, might be a little disappointed with the recent performance of VDIGX, since its five year performance of 13.56% lags the 14.13% performance of the S&P 500. But I wouldn’t blame the fund for this, since its Dividend Appreciation strategy has been a bit out of favor for the last five years. I believe the fund should outperform the S&P 500 over a full market cycle including some bear market periods. VDIGX Category (LB) +/- Category Percentile Rank in Category YTD -3.85% -4.48% +0.63% 41 1 Year +1.08% -1.58% +2.66% 17 3 Year +11.79% +11.37% +0.43% 48 5 Year +13.56% +12.58% +0.97% 34 10 Year +8.42% +6.25% +2.17% 4 15 Year +5.07% +3.97% +1.10% NA Source: Morningstar Mutual Fund Ratings Lipper Ranking : Funds are ranked based on total return within a universe of funds with similar investment objectives. The Lipper peer group is Equity Income. 1 Yr #21 out of 509 funds 5 Yr #23 out of 299 funds 10 Yr #5 out of 192 funds Morningstar Rating : Overall 4 Stars (out of 1,388 funds) 3 Yr 3 Stars (out of 1,388 funds) 5 Yr 4 Stars (out of 1,225 funds) 10 Yr 5 Stars (out of 872 funds) Fund Management The fund has been managed by Donald Kilbride since February 2006. Kilbride seeks to build a portfolio that produces a steady and growing stream of dividends. He looks for companies that have the ability and the willingness to increase their dividends over time. Kilbride does not buy non-dividend paying companies that may begin to offer a payout in the future- he wants the dividends now. Volatility Measures Beta: 0.91 (less volatile than the S&P 500) R- Squared: 0.93 (fairly high correlation with S&P 500) Sharpe Ratio: 1.39 Standard Deviation: 9.27 Comments VDIGX is a concentrated fund and is not an index hugger. It has $24 billion in assets invested in only 46 securities. These are the top ten holdings as of June 30, 2015: Top 10 Holdings % Weight United Parcel Service (NYSE: UPS ) 3.21% Microsoft (NASDAQ: MSFT ) 2.92% UnitedHealth Group Inc (NYSE: UNH ) 2.90% TJX Companies (NYSE: TJX ) 2.87% Honeywell (NYSE: HON ) 2.74% Nike Inc (NYSE: NKE ) 2.69% ACE Ltd (NYSE: ACE ) 2.68% Coca-Cola (NYSE: KO ) 2.60% Accenture PLC (NYSE: ACN ) 2.60% Praxair Inc (NYSE: PX ) 2.49% VDIGX is an excellent mutual fund that can serve as a core holding, especially in a retirement account. In 2008, it held up relatively well losing only 25.57% versus a 37.79% loss for its category peers and a 37% drop in the S&P 500. In times of severe financial stress, VDIGX is a good way to continue investing, since its holdings are very solid and unlikely to go into bankruptcy. Vanguard has set up an interesting competition between VDIGX and VDADX (which is pegged to the Dividend Appreciation Index). These two funds are good test vehicles for active versus passive management using the same basic strategy and it will be interesting to see whether Kilbride can outperform over the longer term. Last year, there was a friendly controversy here on Seeking Alpha between Geoff Considine and Larry Swedroe. Considine listed reasons why dividends are a valid basis upon which to select stocks, while Swedroe disagreed citing some research from DFA. Take a look at this Seeking Alpha article from last year for more information- ” Why Dividends Matter: A Review of Recent Research “. Considine later published a summary on Advisor Perspectives- ” Understanding the Controversy over Dividend‐Based Investing “. I believe that dividend-based investing has a place in any diversified portfolio, especially in retirement accounts. But for those in a higher tax bracket, I think it also makes sense to hold some non-dividend paying stocks (like Berkshire Hathaway (NYSE: BRK.A )) in taxable accounts. Over time, the tax savings will add up. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VDIGX over the next 72 hours. (More…) 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.