The Vanguard Dividend Growth Portfolios: Active Takes The Lead

Includes: VDIGX, VIG, VYM
by: Dale Roberts

Vanguard offers 3 of the most popular Dividend Growth Funds - Dividend growth, high yield and an active fund.

There's enough of a time period to track the performance through a market cycle.

The active Dividend Growth Fund has the lead on total returns, but it's closed. Perhaps investors can simply borrow enough to the 'good ideas' from that fund.

Vanguard offers the two most popular Dividend ETFs. The Vanguard Dividend Appreciation Fund (VIG) tracks the NASDAQ Dividend Achievers Index. That fund requires at least 10 years of annual dividend growth; the index also applies proprietary financial health screens. This is a co-production with NASDAQ.

From the Vanguard site …

Vanguard Dividend Appreciation ETF is an exchange-traded share class of Vanguard Dividend Appreciation Index Fund, which employs a “passive management”—or indexing—investment approach designed to track the performance of the NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index). This index is a subset of the NASDAQ US Broad Dividend Achievers Index and is administered exclusively for Vanguard by NASDAQ. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

This is the most widely held Dividend ETF with over $34 billion of assets under management. And here are the top ten holdings for the fund.

1. Procter & Gamble (PG).

2. Visa (V).

3. Microsoft (MSFT).

4. Johnson & Johnson (JNJ).

5. Walmart (WMT).

6. Comcast (CMCSA).

7. McDonald's (MCD).

8. Abbott Labs (ABT).

9. Medtronic (MDT).

10. Union Pacific (UNP).

The index has seen some recent changes and perhaps a growth boost moving forward. Please have a read of Big Changes At The Top Of The Dividend Achievers Index.

Vanguard also offers The High Yield Dividend Yield ETF (VYM). This fund replicates the FTSE High Dividend Yield Index.

The investment seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that are characterized by high dividend yield. The fund employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index, which consists of common stocks of companies that pay dividends that generally are higher than average. The adviser attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

Of course the big juicy dividends are not all that juicy these days, the fund offers a current yield just above 3%. Here are the top ten holdings for VYM.

1. Johnson & Johnson

2. Exxon Mobil (XOM).

3. JPMorgan Chase (JPM).

4. Procter & Gamble

5. Cisco Systems (CSCO).

6. Verizon Communications (VZ).

7. Pfizer (PFE).

8. Intel (INTC).

9. Chevron (CVX).

10. AT&T (T).

Compared to VIG and within the top holdings we see more exposure to energy and telcos. You can check the Vanguard site for the sector breakdowns and where you are more likely to find those bigger dividend payers.

The Vanguard Dividend Growth Fund (VDIGX) is an actively managed fund. As I wrote in 2014 this fund has a habit of beating the market with regularity.

Check out that article for the top holdings and the approach in 2014. Certainly, the core strategy will stay the same.

Here are the current top holdings of VDIGX.

1. McDonald's

2. American Tower (AMT).

3. Coca-Cola (KO).

4. Microsoft

5. PepsiCo (PEP).

6. Danaher (DHR).

7. Ecolab (ECL).

8. Johnson & Johnson

8. Nike (NKE).

9. Colgate-Palmolive (CL).

10. Medtronic

If you follow the Dividend and Dividend Growth funds you'll know that the active VDIGX holdings are largely constituents within the Dividend Achievers fund - past and present. The name that I am not familiar with as an Achiever is the market-crushing American Tower. That is a lower yielding REIT in well, the cell tower business in the US and around the globe. That's a very good growth story. The fund seeks total returns, not yield.

You'll also see some popular VIG growth names such as Nike (NKE), Visa (V) and Costco (COST). I also see my BlackRock (BLK) is still in there. Through much of the holdings it looks like VIG. But obviously there's a little booster attached to that Dividend Achievers approach. The fund also has the mandate to add some International holdings.

From my previous article on VDIGX. And is seen a reference to Mr. Fish, RIP.

The Vanguard Dividend Growth Fund and manager Mr. Kilbride do not shy away from low yields, and he is more quick to embrace foreign holdings and holdings that are dividend initiators or companies that are not on the Champions, Challengers and Contenders list provided by David Fish. And of course, VDIGX holds many companies with a lower payout ratio. Many studies point to that low payout ratio as being a key metric that seeks out dividend growth's total return outperformance.

The total return comparison.

OK, let's get to the chart that you want to see. The time period is December of 2006 to end of April 2019. The chart is courtesy of

Portfolio 1 is VIG.

Portfolio 2 is VYM.

Portfolio 3 is VDIGX.

Here is the annual returns breakdown.

We simply see better risk-adjusted returns (and total returns) from VDIGX followed by VIG, followed by VYM. Previously I wrote Dividend Growth For Retirees?

Absolutely was the answer. And while this is a look through one market cycle, a retiree would have been able to create greater and more reliable income by way of a total return approach compared to a yield-seeking approach. Further to that my most popular Seeking Alpha article (ever) is Should a Retiree Really Try to Live Off of the Dividends? Trust me as a recent semi-retiree thanks to leaving my full-time work and embracing my no-income site and other writing ventures I get the appeal of income and living off of the dividends. But a greater growth component than might require some share harvesting allows us to seek out a wider universe of stocks and that might/should enable greater long-term portfolio growth with less price risk.

Go borrow some great dividend growth ideas?

The thing is that VDGIX fund is closed to new investors. My readers will know that I think you can simply go 'borrow' enough of those total-return focused dividend growth ideas. I hold a bunch of Achievers, I've simply added to the holdings that were out of favour.

Here's the VDIGX holdings page, I don't think it would mind. Vanguard is a not-for-profit company, it just wants to see investors succeed. An investor might add a few of those growthy Dividend Growth stocks to their Achievers and Aristocrats (NOBL).

Just an idea.

Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.

Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, WMT. 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.