Vanguard Dividend Growth Reopens. Enter at Will.

Good news. Vanguard recently reopened Vanguard Dividend Growth (VDIGX, $26.39), one of its very best funds. What’s more, the fund is relatively low-risk, making it ideal for a bull market that is showing signs of age.

Wellington Management’s Donald Kilbride has piloted Vanguard Dividend Growth since 2006. Since then, the fund returned an annualized 9.0%, or an average of 1.2 percentage points per year better than Standard & Poor’s 500-stock index. (All returns in this article are through March 13 unless otherwise indicated.) Wellington manages several funds under contract with Vanguard.

A big part of the fund’s success can be attributed to its miniscule expense ratio – just 0.22% annually. Very few actively managed stock funds come close to that low price.

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Of course, low fees have been crucial to Vanguard’s long-term success.

Dividend Growth: One of Vanguard’s Best Funds

Most of the attention on Vanguard has focused on its index funds. But low costs and careful attention to choosing and monitoring outside managers has allowed Vanguard to build a group of excellent actively managed funds. And, says Daniel P. Wiener, editor of the Independent Adviser for Vanguard Investors newsletter: “Dividend Growth has been one of the best active funds in Vanguard’s stable.”

Over the past five years, Vanguard Dividend Growth has returned an annualized 8.4% compared to an annualized 7.9% for the S&P 500.

But the real trick: Kilbride delivered those index-beating returns while the fund exhibited about 18% less volatility than the S&P.

That counts for a lot when the stock market turns sour. In 2018’s selloff, for example, Dividend Growth lost 14.5% while the S&P tumbled 19.4%. In the 2007-09 bear market, Dividend Growth lost 42.0% while the S&P plunged 55.3%.

At the same time, don’t expect Dividend Growth to lead the pack in a straight-ahead bull market. Indeed, VDIGX finished in the bottom quartile against other large-blend funds in 2012 and 2016 – years when the S&P posted double-digit gains.

That’s because Kilbride focuses on stocks that can steadily grow their earnings – and distribute them to shareholders. He avoids more speculative fare.

He owns a portfolio of 40 to 50 blue chips, and he holds on to stocks for about five years on average. He invests relatively little in technology compared to the benchmark and he has an overweight in consumer staples and industrials. Top holdings include McDonald’s (MCD), Coca-Cola (KO), Microsoft (MSFT), UnitedHealth Group (UNH) and Johnson & Johnson (JNJ).

Don’t invest in Dividend Growth with the notion of collecting big dividend checks. The fund yields a meager 1.8%. Kilbride eschews stocks paying large dividends – instead, what matters most is that his holdings can grow their cash distributions in the coming years.

Alec Lucas, a Morningstar senior analyst and an investor in the fund, says Kilbride “has a laser-like focus on dividend growth. He looks for companies where there’s dividend growth he can understand.” Morningstar assigns VDIGX its top rating of gold.

Kilbride puts his money where his mouth is, too; the lion’s share of his net worth is in the fund. Heavy manager ownership of a fund he or she manages has been a good indicator of fund performance.

Vanguard closed Dividend Growth in July 2016. Since then, it experienced net outflows of more than $7 billion, and it finally reopened in August 2019. “We’re confident that there is ample capacity to reopen the fund,” Matthew Brancato, head of Vanguard’s portfolio review department, said last year. Vanguard Dividend Growth currently has assets of $39.5 billion.

Those new to VDIGX will need to make a $3,000 minimum initial investment. But Vanguard has a respectable alternative for those working with less.

VIG: Vanguard’s Indexed Option

Not sure whether you want to invest in an actively managed dividend growth fund? Vanguard still has you covered.

Vanguard Dividend Appreciation (VIG) is an exchange-traded fund (ETF) that replicates the Nasdaq U.S. Dividend Select Achievers Index. The index considers only dividend stocks that have hiked their payouts consistently for at least the past 10 years. It screens out less profitable companies and companies with deteriorating fundamentals.

Dividend Growth has topped Dividend Appreciation over most trailing periods. VIG lags VDIGX by an average of 0.61 percentage points annually over the past 10 years. But Dividend Appreciation has been on top in some years, and Dividend Growth can’t compete with the ETF’s 0.06% annual expense ratio. Moreover, ETFs don’t have investment minimums; if you can afford one share, you’re in.

I favor Vanguard Dividend Growth, but they’re both terrific choices. And given their strong returns in lousy markets, either can make a good addition to almost any portfolio.

Steve Goldberg is an investment adviser in the Washington, D.C., area.