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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.

The second dividend equity strategy flavor is dividend growth. Dividend-growth strategies don't focus on above-average dividend payers, but rather on companies that have been increasing their dividend at a faster clip than the rest of the market and have a good shot of continuing to do so. Vanguard Dividend Appreciation ETF is the passive option of this flavor. It charges 6 basis points per year and tracks the Nasdaq US Dividend Achievers Select Index, a market-cap-weighted benchmark, which holds companies that have raised their dividend for at least 10 consecutive years and also passed additional screens for profitability and earnings stability. That makes this Nasdaq benchmark heavier in consumer staples and industrials companies than the broader market, and lighter in energy. The Nasdaq benchmark has consistently held up better than the broader market in downturns. On the other hand, the active version of this flavor, Vanguard Dividend Growth, led by Wellington Management's Donald Kilbride, has had even better downside protection. It now charges 22 basis points per year, and while its portfolio, as of September 2019, had a lower yield than the Nasdaq US Dividend Achievers Select Index, it had a higher total return over the past 10 years. Vanguard Dividend Growth has beaten the Nasdaq benchmark and its passive counterpart in each major downturn since Kilbride started managing in 2006; that includes one severe bear market, the 2007-09 financial crisis, and four subsequent corrections.

In the end, whether investors are seeking income through above-average yields or dividend growth, Vanguard has excellent, low-cost options for them, both active and passive. 

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