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A Survey of Vanguard's Dividend Funds

Dividend-seeking investors can find excellent, low-cost funds--both active and passive--at Vanguard.

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Alec Lucas: Investors have long loved dividend-paying stocks. As John Burr Williams said in the 1930s, "a stock is worth only what you can get out of it." And investors get a lot out of dividends. While dividends aren't contractual payments, companies are loath to cut them, and some prioritize growing them. That's made dividends a reliable source of return. Broadly speaking, dividend equity strategies come in two distinct flavors, and The Vanguard Group has one of each, in active as well as passive varieties. 

The first flavor is a high-dividend-yield strategy, which focuses on companies that pay above-average and sustainable dividends. Vanguard High Dividend Yield ETF is the passive option of this flavor. It charges 6 basis points per year, or $6 for every $10,000 invested, and tracks the FTSE High Dividend Yield Index, which is a market-cap-weighted benchmark composed of the highest-yielding U.S. stocks, excluding real estate investment trusts, or REITs. The active version of this flavor is Vanguard Equity Income; its Investor shares charge 27 basis points per year. Michael Reckmeyer of subadvisor Wellington Management oversees about two thirds of the fund's asset base, and Vanguard's in-house Quantitative Equity Group runs the remaining third. As of September 2019, Vanguard High Dividend Yield ETF, the passive option, had a higher trailing 12-month yield than Vanguard Equity Income, the active option. But Vanguard Equity Income had a higher total return--after fees--over the past 10 years. It outperformed thanks to holding up better than the index in down markets, including three of four corrections.

Alec Lucas has a position in the following securities mentioned above: VDIGX. Find out about Morningstar’s editorial policies.