The Vanguard Dividend Growth Fund (VDIGX 0.64%) seeks to outperform by picking great dividend growth stocks. Its managers try to select dividend stocks that offer potential for rising income in the future, regardless of their dividend history.
As a result, this Vanguard dividend fund typically yields no more than the broad market, but it hopes that dividends from its investments will grow and compound at a rate faster than the stock market average.
Does it really lead on dividend growth?
A fund company can name its fund whatever it wishes, but whether or not it lives up to its name is up to the skill of its portfolio managers.
Net investment income (NII) is a measure that records the income (mostly dividend income) generated by one share of a fund. Over time, the compounded change in net investment income is a generally good measure of the increase in dividends paid by the stocks in the fund.
I reviewed filings for the Vanguard Dividend Growth Fund and found that it beat the dividend growth of the Vanguard S&P 500 Index Fund (NASDAQMUTFUND: VFINX) over a 10-year period. However, over shorter five- and three-year periods, the Vanguard Dividend Growth Fund failed to grow net investment income at the same pace as an ordinary index fund.
|
Period |
Dividend Fund NII CAGR |
S&P 500 Index Fund NII CAGR |
|---|---|---|
|
Last 3 years |
7.4% |
11.7% |
|
Last 5 years |
9.3% |
13.3% |
|
Last 10 years |
6.6% |
6.2% |
Data source: Dividend fund data for the period ended Jan. 31, 2016. S&P 500 Index fund for the period ended Dec. 31, 2015. Data obtained from Certified Shareholder Reports filed with the SEC.
Why the dividend growth fund fails to keep pace
Partially weighing on the dividend fund's ability to grow its income over time is the fact that it comes with a higher fee than the index fund. The dividend fund carries expenses of 0.33% annually vs. 0.16% for the index tracker. In addition, the actively managed dividend fund has several times more turnover, as stocks are bought and sold more frequently. Fund turnover was 26% for the dividend growth fund vs. 3% for the S&P 500 index fund, according to data provider Morningstar.
Interestingly, despite the fact the fund's income growth lagged that of an S&P 500 index fund, it has still managed to outperform the index over one-, three-, five-, 10-, and 15-year periods.
It turns out that the market-beating returns of the Vanguard Dividend Growth Fund have more to do with stock price appreciation than the growing yields from a handpicked assortment of dividend stocks.