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With technology and other growth stocks still the apples of many investors’ eyes, it’s easy to ignore that while domestic dividends are growing, the trailing 12-month dividend yield on basic S&P 500-tracking index funds and exchange traded funds is just 1.31%.
That’s “fine” to the extent that it implies ample room for payout growth, but the problem with that low yield is that it’s far lower than what clients can find with risk-free cash instruments. Of course, the tradeoff is that cash, even with high yields, doesn’t offer much in the way of upside potential, confirming that advisors should inquire about what clients are doing with excess cash.
On that note, advisors should also be prepared with attractive equity income ideas, one of which is the Vanguard Dividend Growth VDIGX. That index fund, which has a minimum investment of $3,000, has been around for 31 years, confirming it is battle-tested across a variety of equity market and interest rate environments.
As highlighted by a 30-day SEC yield of 1.65%, VDIGX isn’t a high-yield strategy. Rather, as its name implies, it emphasizes long-term payout growth. That’s a quality attribute and one that can go unappreciated when glamorous growth stocks lead markets higher, but it’s also one that works well for clients with long-term time horizons.
VDIGX Puts ‘V’ in ‘Venerable’
At the start of this year, Peter Fisher took VDIGX’s reins, succeeding longtime manager Donald Kilbride who is still part of the small team running the fund.
“The strategy here is thoughtful and traditional. Its core philosophy holds that compounding capital over long periods is critical and growing dividends drive that success,” notes Morningstar’s Todd Trubey. “Fisher and Kilbride believe that dividends, which companies pay in cash, are the most dependable measurement of sound operation and overall growth. They prefer to buy firms at reasonable prices, so they often add companies with temporary troubles; this helps positions compound as they hold for the long term—often more than a decade.”
Arguably, VDIGX is a double-edged sword for some clients. While it’s not a dedicated low volatility strategy, emphasizing payout growth can pare a fund’s volatility. Thus, VDIGX has a tendency to perform less poorly when stocks slump, but the other side of that coin is that the fund won’t capture all of the upside in overt bull markets. Still, it’s hard to ignore the favorable volatility traits found with this Vanguard product.
“The fund’s absolute volatility and market sensitivity are extremely low. As of March 31, 2024, among 242 active large-blend funds, its 10-year standard deviation (a volatility metric) is seventh-lowest. Similarly, its 10-year beta (a measure of sensitivity to market movements) of 0.8 is the sixth-lowest of 242 peers,” adds Trubey.
Other VDIGX Perks
Minimum investments can be cumbersome, particularly when ETFs don’t feature those requirements, but VDIGX has other sources of allure. For example, its annual fee of 0.29% is 50 basis points below the category average, according to Vanguard data.
Additionally, the fund’s 42 holdings sport higher return on equity, on average, than the members of the S&P U.S. Dividend Growers Index – the gauge VDIGX attempts to beat. That’s likely one reason the fund’s long-term risk-adjusted returns are enviable.
“Since Jan. 1, 2012, when current portfolio manager Fisher, then an analyst, joined then-portfolio manager Kilbride to form the dividend growth team, the fund has gained 12.6% annually through March 31, 2024, edging out the typical category peer’s 12.3% but lagging the Russell 1000 Index’s 14.2% rise. But its Sharpe ratio, which measures risk-adjusted performance, ranks in the top 15% of the large-blend group and tops the index,” concludes Trubey.
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