New Vanguard Index Funds Go Abroad for Dividends

Investors can’t get enough of dividend stocks these days. So naturally, Vanguard is offering two new index funds that focus on them. The twist this time: They hold foreign stocks.

Vanguard launched the funds, in both mutual fund and exchange-traded fund versions, on March 2. One is called Vanguard International Dividend Appreciation Index (symbol VIAIX for the mutual fund; VIGI for the ETF). The other is Vanguard International High Dividend Yield Index (VIHIX for the mutual fund; VYMI for the ETF).

As their names suggest, the funds have different objectives. International Dividend Appreciation takes a dividend-growth track. It hews to a Nasdaq-developed index of more than 200 foreign companies of all sizes (in developed and emerging countries) that have raised dividends for at least seven consecutive years. International High Dividend Yield tracks an FTSE index of the 800 highest-yielding large and midsize company stocks in developed and emerging foreign markets.

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Expenses are low, not surprisingly. The investor share class of the mutual fund version of International Dividend Appreciation Index costs 0.35% in annual fees; the ETF charges 0.25% a year. International High Dividend Yield costs a tad more: 0.40% for the mutual fund’s investor share class and 0.30% for the ETF.

We like dividend stock strategies. In fact, Vanguard Dividend Growth (symbol VDIGX), an actively managed stock fund, is a member of the Kiplinger 25, the list of our favorite no-load mutual funds. It’s worth noting that at Vanguard, at least, active management has worked better than an indexed approach when it comes to picking dividend stocks. Dividend Growth, steered by Don Kilbride, has consistently outpaced its index-based brethren, Vanguard Dividend Appreciation Index (VDAIX) and Vanguard Dividend Appreciation ETF (VIG). Dividend Growth’s five-year annualized return of 11.9% through March 1 beat both versions of the dividend index fund by an average of roughly 2.1 percentage points per year. Over that stretch, the actively managed Dividend Growth was also less volatile than either of the index-based versions.

Investing overseas has been rough of late. A global index of developed- and emerging-markets stocks has lost an annualized 1.6% over the past three years. Part of the problem has been the almighty dollar. When the greenback strengthens, as it has been doing of late, money invested in foreign currencies gets translated into fewer dollars, hurting returns for U.S. investors. Neither of the two new Vanguard funds will engage in currency hedging.

But a diversified portfolio should have some exposure to foreign stocks. And dividend-paying stocks, if history is any guide, tend to offer a smoother ride than those that don’t pay a dividend. Even better, foreign stocks on average boast a higher yield than U.S. stocks. The MSCI EAFE index, which tracks foreign stocks in developed countries, has a current yield of 3.4%. Standard & Poor’s 500-stock index yields 2.3%.

The new products expand Vanguard’s existing stable of index funds. As Daniel Wiener, a longtime Vanguard watcher and editor of The Independent Adviser for Vanguard Investors, puts it, Vanguard is “slicing the indexing baloney ever finer in the hopes of attracting investors with a desire for yield, no matter where it comes from.”

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Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.