The purpose of this article is to determine the attractiveness of ("Vanguard Dividend Appreciation ETF (VIG)") as an investment option. To do so, I will review the ETF's recent performance, current holdings and allocation, basic metrics, and trends in the market that may affect the fund to attempt to determine where the share price may be headed from here.
To start, a little about VIG. The fund seeks to track the investment performance of the Dividend Achievers Select Index. The fund attempts to hold the same proportions of its stocks as their weightings in the index. The Vanguard Group, Inc., through its Quantitative Equity Group, serves as the investment advisor of the Fund. VIG is currently trading at $68.58/share and pays a quarterly dividend of $.29/share, which translates to an annual yield of 1.7%. Recently, the fund has performed strongly, with a 15% return year to date and a 21% return over the past 52 weeks, excluding dividends.
Clearly, recent investors in VIG have been rewarded handsomely. The fund has rallied along with the market as a whole and has benefited from the growing trend of investors seeking dividend paying ETF's, funds, and stocks. The fund's top ten holdings make up almost 39% of the fund, but they are large, household names, and over 90% of its allocation is in "medium" or larger companies. Only around 8% of the fund is invested in "medium/small" or "small" cap companies. Here is a breakdown of the top holdings in VIG, along with their weights:
|PepsiCo Inc. (PEP)||4.18%|
|Procter & Gamble Co. (PG)||4.18%|
|Coca-Cola Co. (KO)||4.16%|
|Abbott Laboratories (ABT)||4.11%|
|Wal-Mart Stores Inc. (WMT)||4.09%|
|International Business Machines Corp. (IBM)||3.98%|
|Chevron Corp. (CVX)||3.93%|
|McDonald's Corp. (MCD)||3.81%|
|Exxon Mobil Corp. (XOM)||3.77%|
|United Technologies Corp. (UTX)||3.18%|
These are all large cap stocks that have reliable dividends. Thus, it makes sense the fund has performed well over the past few years because investments with those characteristics have outperformed the broader market. However, with the fund trading at all time highs, I wanted to reexamine its holdings and makeup to see if it makes sense to initiate new positions in the fund.
One of my main concerns of the fund has to do with its low dividend yield. The fact that the fund is called "dividend appreciation" in my mind should mean it pays a much higher, and consistently rising, dividend. Of course, the yield has dropped as the share price has appreciated, but that is not my main concern. Recently, the dividend payment has been very volatile and declining, with a recent drop of over 40% in the second quarter of 2013, when compared to the first quarter of '13, from $.50/share to $.29/share. Here is a list of the recent dividend payouts for VIG:
As you can see from this chart, the fund has a history of a fluctuating dividend that does not always rise. While the fund is reliant on what the companies it is composed of do, the fact that the fund has over 140 holdings at any given time probably contributes to this volatility. While all funds fluctuate a bit, funds such as the DVY (DVY) and SDY (SDY) are still yielding over 3.3% and 2.7%, respectively, so VIG is lagging far behind its peers in this regard. Additionally, the PE ratio for VIG is currently over 14. While this is not unusually high, I am willing to pay up in terms of PE for high yielding stocks only. Dividend seeking investors are not getting an impressive dividend here, yet they are still paying a premium for the privilege of owning VIG. This metric again compares negatively to competing funds DVY and SDY, which have current PE's of 9 and 11.6, respectively.
On the upside, I feel that VIG is properly diversified, as it should be with such a large amount of holdings. No one stock particularly dominates the fund, with no holding over 4.5% of the fund. Additionally, the fund currently has holdings in 10 different sectors, although two of which, utilities and telecommunication services, have essentially insignificant amounts. This probably contributes to the lower, and declining, yield as utilities tend to have stable and attractive dividend payouts.
The one sector I see the fund being underweight is in financials, at only 7.5%. While there is clearly a reasonable argument to be cautious of financials given the recession we recently experienced, financial stocks have rallied since the beginning of last year and are much more attractive investments to me at this time. I see financials such as banks and investment companies continuing to do well as home prices appreciate and unemployment continues to drop. I see each of those trends continuing, so I would prefer the fund to add to its financials allocation. However, as the fund attempts to keep expenses low by not being actively managed, it could take some time for this to occur.
Bottom line: If you are buying VIG for stock appreciation because of confidence in large cap U.S. stocks, the proper risk reward is probably there. VIG has been performing strongly, and I expect investors to continue to be attracted to dividend paying ETF's because of their low fees, easy diversification, and dividend payouts. However, if you are buying VIG because you are seeking a reliable high-yield dividend investment, now does not appear to be the best entry point. The fund has not done a good job at continually growing the dividend, which is ironic because the name of the fund suggests that is the primary purpose it was created. With such a dramatic drop since the last quarter, I want to wait and see the next few payouts to regain my confidence in VIG's ability to satisfy dividend seeking investors.