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Summary

  • VIG is an ETF offered by Vanguard to allow for investment in companies with a record of growing dividends over a number of years.
  • The top 25 holdings comprise 61% of assets.
  • The forecast dividend growth of the top 25 holdings passes the sniff test.

In a recent article linked here, I looked at the top 25 holdings of the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) and tried to determine if there was a reasonable expectation of dividend growth amongst those names. Since VYM is not marketed as a dividend growth ETF, I used very pessimistic projections for dividend growth. By contrast, Vanguard Dividend Appreciation Index ETF (NYSEARCA:VIG) is an ETF that explicitly holds dividend growers in its portfolio. Here, I pull out the top 25 names of the portfolio and try to give a ballpark estimate of the dividend growth that could be expected from a portfolio of just those 25 names, as weighted in VIG. Where my article on VYM used worst-case scenario projections, since VIG explicitly holds dividend growers, I will try for a more accurate analysis.

The Vanguard Dividend Appreciation Index ETF portfolio consists of 164 stocks. The average market capitalization is about $50 billion. The ETF has had very low turnover, with the most recently reported number being 3%. Based on the trailing twelve months, it yields 1.88%. The expense ratio is 0.1%, which is relatively low for this type of fund. The top 25 holdings, which I examine in isolation here, comprise about 61% of assets. [All data in this paragraph from Morningstar.]

The Holdings

The top 25 holdings, as reported by Morningstar based on portfolio holdings as of March 31, 2014, with their percentage allocations are:

Top 25 Holdings

Ticker

% Portfolio
Weight

Shares
Owned

International Business Machines Corp.

IBM

4.13

4,915,274

Wal-Mart Stores Inc.

WMT

4.07

12,180,082

Exxon Mobil Corporation

XOM

4.03

9,445,681

Coca-Cola Co.

KO

4.02

23,810,743

PepsiCo Inc.

PEP

3.87

10,613,517

Qualcomm, Inc.

QCOM

3.86

11,195,711

Johnson & Johnson

JNJ

3.64

8,488,505

United Technologies Corp.

UTX

3.25

6,370,490

3M Co.

MMM

2.74

4,628,761

CVS Caremark Corp.

CVS

2.67

8,165,526

Occidental Petroleum Corporation

OXY

2.31

5,553,496

Caterpillar Inc.

CAT

1.93

4,442,915

Walgreen Company

WAG

1.91

6,613,889

Medtronic, Inc.

MDT

1.87

6,943,344

Colgate-Palmolive Company

CL

1.83

6,466,748

Monsanto Company

MON

1.82

3,655,199

Abbott Laboratories

ABT

1.81

10,736,467

EOG Resources Inc.

EOG

1.62

1,893,596

Nike, Inc. Class B

NKE

1.59

4,919,230

Texas Instruments, Inc.

TXN

1.56

7,556,623

Lowe's Companies Inc.

LOW

1.53

7,146,297

Emerson Electric Co.

EMR

1.43

4,898,003

TJX Companies

TJX

1.31

4,953,950

FedEx Corporation

FDX

1.26

2,174,398

Praxair, Inc.

PX

1.17

2,045,341

We note right away that these are some very familiar names.

Next, I turned to Dave Fish's remarkable Dividend Champion's spreadsheet, which includes a wealth of data. To get a sense of the dividend growth history of these 25 holdings, I pulled out the number of years each stock had grown its dividend, as reported on the CCC spreadsheet:

Number of years of increasing dividends

Number of holdings

0 - 9

1

10 - 20

12

20 - 30

1

30+

11

The 1 holding in the 0-9 category is Abbot Laboratories, which recently spun off AbbVie (NYSE:ABBV). Prior to the spin-off, Abbot had a storied dividend growth history. In total, the dividend growth history catalogued here would be very reassuring to many investors, and suggests that VIG is building the sort of portfolio that its name implies.

Forecasting Dividend Growth

To try to get a ballpark for the dividend growth of this portfolio, I proceeded as follows:

1) For each of the 25 stocks, I computed the income it would produce today based upon the currently listed dividend distribution and the number of shares held.

2) For each of the 25 stocks, I used the dividend information in the CCC spreadsheet to compute the percentage increase of the dividend over the last 7 years.

3) I took those 7 percentages, dropped the highest one, and averaged the remaining 6, which I recorded. In the case of ABT, I skipped this step.

4) Next, using FastGraphs, I recorded analyst projections of EPS growth for each stock.

5) To choose a "dividend growth percent" for each stock, I took the smaller of the historical number computed in step 3 and the forward looking EPS number in step 4.

6) Using the result from step 5, I forecast a future income distribution from each holding. Then I summed all income distributions from "year 0" and from "year 1", and computed the growth in income for the portfolio.

Before giving the results, a few words about the methodology I chose. First, I wanted to try to incorporate the dividend growth history of the stocks. To account for some names making extraordinary distribution growth over short time periods, I dropped the highest and worked with the remaining six with the idea that that would smooth things out and give a more realistic expectation for the future. I also wanted to incorporate a forward-looking metric, which is why I chose EPS projections. In this case, I'm implicitly assuming that payout ratios would stay constant. This is not a perfect assumption; however, I suspect it's "good enough" for a first-order approximation. I chose the smaller of these two numbers, since I prefer my projections to not be too pie-in-the-sky. In some cases, the historical number was the smaller one, and in others, the EPS number.

Here are the results for the portfolio:

Top 25 Holdings

Ticker

Shares
Owned

Dividend per Share ($)

Income Year 0

Historical Div. Growth. Proj.

EPS projection

Dividend per Share ($) after growth

Income Year 1

International Business Machines Corp.

IBM

4,915,274

4.4

21627205.6

16.34%

10.50%

4.862

23898062.19

Wal-Mart Stores Inc.

WMT

12,180,082

1.92

23385757.44

13.93%

8.30%

2.07936

25326775.31

Exxon Mobil Corporation

XOM

9,445,681

2.76

26070079.56

8.54%

5.10%

2.90076

27399653.62

Coca-Cola Co.

KO

23,810,743

1.22

29049106.46

8.34%

6.20%

1.29564

30850151.06

PepsiCo Inc.

PEP

10,613,517

2.62

27807414.54

8.89%

7.40%

2.81388

29865163.22

Qualcomm, Inc.

QCOM

11,195,711

1.68

18808794.48

13.62%

13.20%

1.90176

21291555.35

Johnson & Johnson

JNJ

8,488,505

2.8

23767814

8.14%

6.90%

2.9932

25407793.17

United Technologies Corp.

UTX

6,370,490

2.36

15034356.4

10.63%

11.30%

2.610805144

16632108.06

3M Co.

MMM

4,628,761

3.42

15830362.62

4.25%

11.30%

3.565294717

16502897.14

CVS Caremark Corp.

CVS

8,165,526

1.1

8982078.6

26.16%

13.30%

1.2463

10176695.05

Occidental Petroleum Corporation

OXY

5,553,496

2.88

15994068.48

15.69%

4.90%

3.02112

16777777.84

Caterpillar Inc.

CAT

4,442,915

2.4

10662996

10.20%

7.30%

2.5752

11441394.71

Walgreen Company

WAG

6,613,889

1.26

8333500.14

21.64%

13.10%

1.42506

9425188.658

Medtronic, Inc.

MDT

6,943,344

1.12

7776545.28

12.10%

6.50%

1.1928

8282020.723

Colgate-Palmolive Company

CL

6,466,748

1.44

9312117.12

10.34%

8.90%

1.56816

10140895.54

Monsanto Company

MON

3,655,199

1.72

6286942.28

17.65%

14.80%

1.97456

7217409.737

Abbott Laboratories

ABT

10,736,467

0.88

9448090.96

#N/A

11.50%

0.9812

10534621.42

EOG Resources Inc.

EOG

1,893,596

0.5

946798

14.90%

19.30%

0.5745076667

1087885.42

Nike, Inc. Class B

NKE

4,919,230

0.96

4722460.8

13.59%

13.80%

1.090471677

5364280.985

Texas Instruments, Inc.

TXN

7,556,623

1.2

9067947.6

24.51%

10.30%

1.3236

10001946.2

Lowe's Companies Inc.

LOW

7,146,297

0.72

5145333.84

17.60%

16.50%

0.8388

5994313.924

Emerson Electric Co.

EMR

4,898,003

1.72

8424565.16

7.38%

10.70%

1.846875366

9046001.083

TJX Companies

TJX

4,953,950

0.7

3467765

21.64%

12%

0.784

3883896.8

FedEx Corporation

FDX

2,174,398

0.6

1304638.8

6.87%

18.80%

0.6412005721

1394225.242

Praxair, Inc.

PX

2,045,341

2.6

5317886.6

11.56%

11.70%

2.900597643

5932711.284

Portfolio Income

316574625.8

343875423.7

Put together, this suggests income growth of 8.62%.

Interpreting this Number

To put this number into context, we can compare to the companies in Dave Fish's CCC spreadsheet. The average most recent percent increase in the dividend for the 105 companies with 25+ years of dividend growth histories is 8.57. For companies with a 10-24 year history of dividend growth, the number is 8.36, and for companies with a 5-9 year history, the number is 9.89. If we just look at the companies with 10+ years of dividend growth (the most appropriate yardstick given VIG's objectives), the number is 8.42. These numbers are all backwards-looking, and are based on the past year's dividend changes.

Comparing the forecast for 8.62% dividend growth from the computations above, I think we're likely to be in the right ballpark. Some stocks will deliver more than forecast; others will deliver less. On the whole, while it may not average out exactly, I bet it comes pretty close.

Disclaimer

Reality will be different from this projection. Models and projections, such as those used above, are useful to get a feel of what might happen. They should not replace investor judgment and due diligence.

By no means should this article be interpreted as a complete analysis of the investment merits of VIG. This is a look at a single aspect of such an investment.

Source: Forecasting Dividend Growth Of The Top 25 Holdings Of Vanguard Dividend Appreciation ETF