Dividend growth investing is one of the most popular topics on Seeking Alpha. I do not view this as a fleeting phenomenon given: 1) economic and stock market volatility that has driven equity fund flows to the United States and to the safety and surety of high quality dividend payers; 2) anemic returns on traditional fixed income instruments driven by accommodative monetary policy, and 3) a demographic shift in the developed world that features a large cohort in or nearing retirement age and looking for more income from their investment portfolio.
In May, I wrote about The Dividend Aristocrats, an equal-weighted index of S&P 500 constituents which had followed a policy of increasing dividends every year for at least the last twenty-five years. Since the index was constructed in 1990, the Dividend Aristocrats had an average return 2.23% higher than the broader market with only 80% of the volatility. The Dividend Aristocrats outperformed the broader market in 13 of 22 years, including every down year for the market, strengthening the claim of this strategy's use as a defensive equity market play. The Dividend Aristocrat index is approximated through the SPDR S&P Dividend ETF (NYSEARCA:SDY).
This article introduces the Dividend Achievers, replicated through the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG). While this fund launched in April 2006, the index it replicates, Mergent's Broad Dividend Achievers Index, has history back to 2000, giving us a longer look-back to gauge the performance of the fund. Below is the cumulative total return of this index versus the cumulative total return of the S&P 500 Index (NYSEARCA:SPY) since the beginning of 2000:
Skeptics would be right to point out that this time period featured two very weak equity markets (the tech bubble collapse and the financial crisis), and that dividend payers should have been expected to outperform in this low return environment. Over the next ten years, I would not predict that either the Dividend Aristocrats or the Dividend Achievers will necessarily outperform the broader market, but I will absolutely predict that the return stream will be less variable. The Dividend Achievers produced their relative outperformance with only 79% of the volatility of the broader market (as measured by the standard deviation of the quarterly returns). There is growing evidence that the highest volatility stocks have not produced returns consistent with their increased risk relative to low volatility stocks. For investors seeking less risk in their equity investments, this strategy is likely to capture this low volatility anomaly.
The underlying index to VIG is a modified market capitalization index designed to track the performance of companies that have at least ten years of increasing dividends and are listed for trading on the NYSE, Nasdaq, or AMEX. The ten largest holdings at the end of the second quarter is a listing of domestic royal blue chips, including Wal-Mart Stores (NYSE:WMT), Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), International Business Machines (NYSE:IBM), Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Procter & Gamble (NYSE:PG), United Technologies (NYSE:UTX), McDonald's (NYSE:MCD), and 3M (NYSE:MMM). These top ten holdings were 39.2% of net assets, and the fund held 133 companies.
The median market capitalization for the VIG constituents of $40.2bn is actually smaller than the $57.2bn median market capitalization of the S&P 500. The P/E ratio at 6/30 of 15.2x was only nominally higher than the broader market's 13.8x at the same date. However, the indicated yield of 2.12% on VIG is only 11% higher than the 1.91% on the S&P 500 - a fact that might turn off dividend investors. Notably, the five-year dividend growth rate of VIG was 8.47% versus the five-year dividend growth rate of 0.9% on the S&P 500 as a host of constituents in the broader index pared back dividends during the financial crisis.
If certain Seeking Alpha investors are looking for lowered equity volatility, dividend growth in all domestic market environments, and wrapped in a low cost vehicle (0.18% expense ratio), VIG may be an interesting fund for you. For more information, see the fact sheet, product overview, and summary prospectus.
Disclosure: I am long SPY, SDY. 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.