Vanguard Dividend Growth Reopens. Enter at Will.

Why you should consider investing in this terrific fund now.

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.

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.

Most Popular

Election 2020: Joe Biden's Tax Plans

Election 2020: Joe Biden's Tax Plans

With the economy still in trouble, tax policy takes on added importance in the 2020 election. So, let's take a look at what Joe Biden wants to do abou…
October 22, 2020
How to Be Happy (Not Bored!) in Retirement – Starting Today
happy retirement

How to Be Happy (Not Bored!) in Retirement – Starting Today

Here are 12 ways to prepare now for retirement so that you’ll be happy, active, fulfilled and never, ever bored.
October 21, 2020
2 Credit Card Gotchas to Watch Out For
credit cards

2 Credit Card Gotchas to Watch Out For

After an infuriating wake-up call with her own credit card company, one financial services consultant wants consumers to know something: It’s smart to…
October 20, 2020


11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
13 Dividend Stocks That Have Paid Investors for 100+ Years

13 Dividend Stocks That Have Paid Investors for 100+ Years

Here are 13 dividend stocks that each boast a rich history of uninterrupted payouts to shareholders that stretch back at least a century.
May 21, 2020
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
October 21, 2020