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The Lazy Retirement Portfolio: The Vanguard Dividend Growth Fund Is Worth Exploring

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About: Vanguard Dividend Growth Fund Inv (VDIGX)
by: The European View
The European View
Long only, long-term horizon, dividend investing, dividend growth investing
Summary

Actively managed funds have a hard time due to the overwhelming popularity of ETFs.

However, I think that The Vanguard Dividend Growth Fund is worth exploring for some investors.

This is especially true for those investors who do not attach importance to stock picking themselves, but who nevertheless pursue a dividend strategy.

Introduction

Today, actively managed funds have a hard time due to the overwhelming popularity of ETFs. The Vanguard Dividend Growth Fund (VDIGX) is such an actively managed fund. According to Vanguard, the fund seeks to provide, primarily, a growing stream of income over time and, secondarily, long-term capital appreciation and current income. According to Morningstar, the fund is still open, but it needs a minimum initial investment of USD 3,000. This makes the analysis interesting for two groups of investors. First, the article is for existing investors. Furthermore, the fund could be also worth exploring for risk-averse investors who save for their retirement. I will explain why this is the case in the following analysis.

Fund analysis

According to Vanguard:

the fund is designed to provide investors with some income while offering exposure to dividend-focused companies across all industries. The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time."

Given that, you can see the annual distribution as of June 2019 below:

Source: Morningstar

For an actively managed fund, the expenses (0.22%) are quite low. The defensive approach taken by the fund also becomes clear when looking at the upside and downside capture ratio. In downturns, the fund appears to outperform the benchmark. Of course, this is at the expense of the upside potential during upswings:

Source: Morningstar

The benchmark of the fund is the NASDAQ US Dividend Achievers Select. The fund is invested in 42 stocks right now. You can see a list of all stocks by clicking here. Overall, the fund contains less than 1/4 of the companies that the benchmark has. This means that the benchmark index is more diversified. However, an investment in 42 companies already includes a strong diversification. The fund also tends to invest in larger companies, as the average market capitalization is more than USD 10 billion above the average benchmark capitalization. In addition, the average P/E of the fund is below its benchmark:

The following companies are the ten largest holdings of the fund. Together, these stocks form 31.8% of total net assets:

However, the composition of the fund differs from the benchmark. However, this is to be expected, as otherwise, an active management of the fund would not be necessary.

It is noticeable that the fund overweights companies that are traditionally regarded as defensive. Compared to the benchmark, the company is much less invested in rather volatile information technology companies.

Looking at the dividend growth of the 10 largest companies, the following picture emerges.

Of the 10 largest companies, half have a negative growth rate. Conversely, for two companies, the growth rates are positive, and for three companies, the growth rates are stable. That gives altogether a mixed picture.

However, it must also be borne in mind that the fund is not interested in seeking the highest possible dividends, but in making long-term investments in companies that pursue a shareholder-friendly dividend policy. And especially in the case of companies with declining growth rates, it can be said that these were companies that performed well in the past and gave their shareholders a lot of pleasure. The average rate of increase last year, at more than 9 percent, was more than four times the rate of inflation. Last year's increase was even higher than the average increase of the last three years (8.2 percent).

Conclusion

Of course, investors can also simply buy the individual shares of the fund themselves. However, this leads to far more transaction costs than if investors simply buy into the fund. Investors who do not attach importance to stock picking themselves, but who nevertheless pursue a dividend strategy, have a good opportunity with the fund to invest in the long term.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.