This fund forgoes high yield to pursue stocks that can sustain or grow their dividend payments.

fundcoverage@morningstar.comVIG
by Adam McCullough
4/30/2019
Vanguard Dividend Appreciation ETF

Vanguard Dividend Appreciation ETF VIG is an excellent fund that offers a diversified portfolio of highly profitable U.S. dividend-paying stocks. The fund's low fee contributes to its edge over the long run and supports its Morningstar Analyst Rating of Gold.

This strategy focuses on dividend growth rather than dividend yield. This approach reduces the fund's exposure to firms with weak fundamentals that may not be able to sustain their dividend payments, which is a risk that often accompanies a narrow focus on yield. The fund builds its portfolio by selecting only among stocks that have increased their dividend payment for at least 10 consecutive years. This stringent hurdle restricts the fund to holding highly profitable firms with shareholder-friendly management teams that have consistently raised dividend payments.

On top of this dividend growth screen, the strategy applies additional proprietary screens to filter out firms that may not be able to sustain their dividend growth. It weights its holdings by market cap, which helps further keep risk in check. Market-cap weighting tilts the portfolio toward the largest dividend-paying stocks, which may not be the highest-yielding. Bigger firms should be better able to maintain their dividend payments during a market downturn than smaller, higher-yielding stocks. Market-cap weighting also incorporates knowledge of the market and reduces the fund’s exposure to stocks as their fundamentals deteriorate. The portfolio caps single-stock bets, which are usually uncompensated sources of risk.

As of this writing, the strategy’s dividend yield of 2 percentage points annually matches the current dividend yield of the Russell 1000 Index. But the strategy’s tilt toward more stable stocks has helped it shine during market downturns. Its drawdown during the bear market from October 2007 through March 2009 measured 9 percentage points less than the Russell 1000 Index drawdown.

The fund has outpaced its average large-blend Morningstar Category peer by 1.6% and kept pace with the Russell 1000 Index from its inception in May 2006 through March 2019 with less risk. 



Portfolio Construction

The fund targets profitable dividend-paying U.S. stocks with a history or raising their dividend payments. This results in a well-diversified portfolio of dividend-paying stocks with durable competitive advantages and shareholder-friendly management teams that should weather market downturns better than most and reward investors over the long haul. It earns a Positive Process Pillar rating. The fund replicates the Nasdaq U.S. Dividend Achievers Select Index. This is a subset of the Nasdaq U.S. Broad Dividend Achievers Index, which holds U.S. stocks that have grown their regular dividend payment for at least 10 consecutive years. From this broader list of stocks, the fund excludes REITs and limited partnerships and applies proprietary profitability screens to land on its final list of constituents. While Nasdaq does not disclose its screens, these filters seem to favor profitable companies with stable earnings. The fund weights its holdings by market capitalization, and individual positions are capped at 4% of the portfolio. The index reconstitutes annually in March, but stocks with deteriorating fundamentals may be dropped at any time.

Fees

Vanguard charges an 0.08% expense ratio of for this fund, which places it among the cheapest dividend-growth funds available. It earns a Positive Price Pillar rating. Over the trailing three years ended March 2019, this fund lagged its benchmark by 5 basis points annually, less than its average annual fee over this period.

S&P 500 index data: S&P 500 Copyright @ 2019

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