Many investors will criticize ETFs because they hold too much. They suffer from di-worsification as many will "put it". Even though I am a big fan of Vanguard's Dividend Appreciation Fund (NYSEARCA:VIG) it does appear that it holds many companies that certainly don't meet the mandate of an investor looking for a combination of growing dividends and decent yield. The fund holds many companies that offer a current yield under 1% and many more with a yield below 2%.
The current yield on total VIG is just above 2% according to Google Finance. That yield in fact is not much more generous than the yield on the broader market S&P 500 (NYSEARCA:SPY), which is 1.9%.
That said, VIG does have a very decent dividend growth rate moving into the recession and coming out of the recession. Dividends were certainly challenged in 2009. Of course investors of all stripes were hit on the income and portfolio value front during the Great Recession. You can read more on the experiences of many Seeking Alpha investors in the comment section of my article Losing It Big Time With Bank of America (NYSE:BAC). That would be me doing the losing on BAC.
We can see that there is very solid dividend growth over time with VIG. Checking in with the Dividend Growth history of the Total VIG holdings we find that VIG increased its quarterly payment from an area of .18 (average of five first dividend distributions) to .32. An increase over that 6½ year period of 80%. That will give us a Dividend CAGR (Compound Annual Growth Rate) of 9.7%.
But what if an investor was more concerned with current yield of the portfolio, that is, they are harvesting the dividends for spending, or perhaps they simply seek more yield to reinvest back into their holdings?
VIG's criteria insists that companies have a history of increasing their dividends over longer periods. Vanguard also applies proprietary value metrics. Those value screens are obviously useful in finding value that translates to total return. In my observation, inclusion in VIG puts a stamp of approval on a company. I did speak with Vanguard, but they ain't talking. Value certainly means finding companies that are attractively priced. The proof is in the puddin' as you might say, Vanguard has outperformed the broader market from inception (May of 2006) by over 1% per year and with slightly lower beta or volatility. It is a great total return vehicle that provides income growth. Here's VIG vs SPY moving through the recession, that's VIG wearing the green jersey.
But what if we boosted that income by stripping out all of those dividend pretenders? Here's the VIG list that only includes companies that have a yield of 2.2% or more.
|Maxim Integrated||3.65||8 b||Tech Manufacturing|
|Chevron||3.27||235 b||Oil and Gas|
|Helmerich & Payne||3.13||8 b||Oil and Gas|
|Procter & Gamble||2.85||230 b||Consumer|
|Occidental Petroleum||2.76||75 b||Oil and Gas Chemical|
|Exxon Mobil||2.63||417 b||Oil and Gas|
|Air Products & Chem||2.59||23 b||Industrial|
|Aqua America Inc||2.58||4 b||Water Wastewater|
|Emerson Electric||2.56||47 b||Global Tech|
|ONEOK Inc||2.55||12 b||Diversified Energy|
|Harris Corp||2.53||7 b||Tech|
|Partner Re Ltd||2.53||5 b||Insurance|
|Stanley Black & Decker||2.48||12 b||Global Manufacturing|
|General Dynamics||2.47||32 b||Aerospace Defense|
|CH Robinson||2.42||9 b||Industrial Logistics|
|Praxair Inc.||2.4||37 b||Industrial|
|RPM international Inc||2.4||5 b||Chemical Manufacture|
|MDU Resources Group||2.38||5.6 b||Natural Resources|
|Linear Technology||2.37||10 b||Tech|
|Abbott Laboratories||2.34||58 b||Health|
|Norfolk Southern||2.32||38 b||Transportation|
|JM Smucker Co||2.22||11 b||Consumer|
|Genuine Parts||2.15||12 b||Auto Industrial|
And here are the smaller caps.
|RLI Corp||4.55||2 b||Insurance|
|Erie Indemnity Co||3.58||3.3 b||Insurance|
|South Jersey Industries||3.42||1.8 b||Energy Services|
|MGE Energy Inc||3.02||1.3 b||Energy|
|Connecticut Water Serv||3.0||367 m||Utilities|
|American States Water||2.91||1.1 b||Utilities|
|York Water Co||2.82||267 m||Utilities|
|Cracker Barrel Old||2.79||2.6 b||Retail|
|SJW Corp||2.69||546 m||Utilities|
|Brady Corp Class A||2.64||1.5 b||Manufacturing|
|Bemis Co Inc||2.63||4 b||Manufacturing|
|Owens & Minor Inc||2.58||2.3 b||Manufacturing|
|McGrath RentCorp||2.48||994 m||Business Rental|
|Mine Safety Appliances||2.49||1.8 b||Industrial|
Vanguard's total holdings of 146 is now down to a list of 45. As we know it doesn't necessarily take a large number of companies to create diversification if we're spread across various sectors. There's enough to choose from. In fact, in a series of articles I played around with VIG by skimming the top ten from VIG's holdings as it appeared to be a great list of stocks in 2012. You can find that article here. It may have been a fluke, but the historical VIG top ten beat the you-know-what out of the total market.
From VIG inception through 2012, and from my top ten exploration the VIG big caps outperformed the broader VIG. I found that trend started to reverse in this article here. Adding 10 more of the (smaller) large caps then provided the needed diversification. Ten was not enough. Twenty did the trick.
So skimming enough of the higher yielders from VIG just might be a way to get that quality stamp of approval and yield in one package. Or you just might get the impetus to do some investigation on a few of the names on this list if you manage your own selections. One theory I explored briefly was that there may be more hidden value in a few of the lesser known names on that list. There are certainly many (mid to small cap) companies on that list that have an impressive total return history. That said, I have no idea if those companies were in VIG in 2007, 2008, 2009 etc. There's survivor bias with respect to this list, that is current VIG holdings. It's also possible that the companies that were stripped out might be the total return champions moving forward. With many seeking and chasing yield (and willing to pay up for it), it's possible and maybe even likely that there's more value in the companies that were excluded? That's certainly a consideration for those seeking total return. For those seeking yield, the important metric is the dividend payments or money in the bank.
All said, I will likely turn into an ETF skimmer one day in order to lower the fees I pay with respect to the ETFs that I hold. And I will likely turn to Vanguard and VIG and ask them to watch my companies for me.
Vanguard, I thank you in advance.
Additional disclosure: Dale Roberts aka cranky is a Streetwise Coach at ING Direct Mutual Funds. Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process.