Please ensure Javascript is enabled for purposes of website accessibility

The Shocking Truth About the Vanguard Dividend Growth Fund

By Jordan Wathen - Updated Jun 30, 2017 at 5:41PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stock price appreciation, not dividend growth, may play a more important role in the market-beating performance of this dividend stock fund.

The Vanguard Dividend Growth Fund (VDIGX) 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Vanguard Specialized Funds - Vanguard Dividend Growth Fund Stock Quote
Vanguard Specialized Funds - Vanguard Dividend Growth Fund
VDIGX

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
321%
 
S&P 500 Returns
111%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.