4 Highly Rated Vanguard Dividend and Income Funds
This quartet of Vanguard dividend and fixed-income funds earn high marks from CFRA. Better still: They can be had for a song.
Investors seeking to establish the income portion of their portfolio often do so via funds. After all: If dependable income is a priority, you probably also value stability – and a diversified bundle of holdings will provide much more of that than a few individual stocks.
While there's certainly a wide variety of options out there, those looking to keep costs low but quality high would do well to examine some Vanguard dividend and income funds.
Vanguard's name is inextricably attached to its dirt-cheap fees; 9 in 10 Vanguard mutual funds rated by independent research firm CFRA have expense ratios of less than 0.30%.
But don't sleep on the quality of Vanguard's products. Nearly 60% of its mutual funds earn a four- or five-star rating from CFRA.
Today, we're going to delve into four Vanguard dividend and income funds that boast both low fees and high ratings. Todd Rosenbluth, CFRA's Head of ETF and Mutual Fund Research, calls these four funds "examples of appealing, yet different, equity funds based on our risk, reward, and cost analysis."
Data is as of March 22. Yields on equity funds represent the trailing 12-month yield. Yields o bond funds are SEC yields, which reflect the interest earned after deducting fund expenses for the most recent 30-day period.
Vanguard Dividend Appreciation Index Fund Admiral
- Fund category: Large blend
- Assets under management: $54.5 billion
- Dividend yield: 1.6%
- Expenses: 0.08%, or $8 for every $10,000 invested
Vanguard Dividend Appreciation Index Fund Admiral (VDADX, $39.14) is a passive mutual fund that tracks an index of U.S. large-cap companies that have raised their dividends over time. Specifically, each constituent has improved its payout for at least 10 consecutive years.
VDADX's portfolio consists of a blend of growth and value stocks of companies that demonstrate both the ability and the commitment to grow their dividends over time. As a result, VDADX shareholders get quality large caps including Microsoft (MSFT) and Walmart (WMT).
Top sector holdings at the moment are consumer discretionary (23%) and industrials (21%), with a 15% weighting in healthcare as well. Technology makes up 12% of assets, but that's less than half of what you'll find in the S&P 500. That's typical of the VDADX, which means performance might at times lag a benchmark like the S&P 500 or Nasdaq Composite when growth is in favor.
But that's what you typically can expect from dividend and income funds. That's OK. You're still getting a solid, low-cost product that can produce decent results in the long run while taking on below-average risk.
"VDADX's five-star rating is driven by its low risk profile, based on its holdings and performance record, as well as its extremely low 0.08% expense ratio," Rosenbluth says.
Vanguard Dividend Growth Fund
- Fund category: Large blend
- Assets under management: $45.6 billion
- Dividend yield: 1.6%
- Expenses: 0.27%
If you prefer a human manager at the helm, Vanguard Dividend Growth Fund (VDIGX, $33.96) is an actively managed product that offers exposure to a diverse mix of dividend focused companies.
It's difficult to find similar dividend and income funds with such low expenses. "Investors willing to pay a little more for active management will find VDIGX appealing as the fund's 0.27% expense ratio is still sharply lower than peers' 0.94%," Rosenbluth says.
Couple the low fees with above-average long-term returns, and you have yourself a strong income-focused core holding.
The VDIGX portfolio currently consists of roughly 40 large-cap stocks, with the highest weights currently belonging to healthcare (21%) and industrial stocks (21%). Consumer staples (15%), consumer discretionary (12%) and financials (11%) also make up large chunks of assets. This results in a set of top-10 holdings that include the likes of American Express (AXP), UnitedHealth Group (UNH) and Johnson & Johnson (JNJ).
Again, the focus here is dividends, which results in a lack of growth, but also below-average risk. That tilt hasn't benefited the fund in the relatively short-term, but VDIGX has beaten the category average over the past 10 years, and it's better than 88% of peers over the past 15.
Vanguard Long-Term Corporate Bond Index Fund Admiral
- Fund category: Long-term bond
- Assets under management: $5.3 billion
- SEC yield: 3.4%
- Expenses: 0.07%*
Vanguard Long-Term Corporate Bond Index Fund Admiral (VLTCX, $26.80) is a low-cost, index-based fixed-income mutual fund that holds investment-grade corporate bonds with long-term maturities.
Before you buy shares of VLTCX (or any long-term bond fund), remember: Long-term bond prices tend to see more downside pressure in a rising-rate environment than intermediate- and short-term bonds.
Prospective buyers should also be aware of the credit risk associated with investment-grade bonds, which comprise the majority of the VLTCX portfolio. Vanguard Long-Term Corporate Bond Index holds more than 2,400 bonds with an average effective maturity of 23 years. Roughly half the portfolio is in BBB-rated bonds (the lowest level of investment-grade), and another 39% is in A-rated bonds, with the rest rated AA or AAA.
That said, investors in long-term bonds have historically been rewarded with much more stock-like returns over longer time horizons.
VLTCX, which is among the few Vanguard dividend and income funds garnering a full five stars from CFRA, "charges a minuscule 0.07% expense ratio and has a strong reward and lower risk profile, based on its performance record and income generation, according to our model," Rosenbluth says.
* VLTCX is one of a handful of Vanguard products that charges an upfront purchase fee. This fee is 1%. Investors who have the option of investing in ETFs could avoid this by purchasing the Vanguard Long-Term Corporate Bond ETF (VCLT), which also has slightly lower expenses, at 0.05%.
Vanguard Long-Term Investment-Grade Fund
- Fund category: Long-term bond
- Assets under management: $20.0 billion
- SEC yield: 2.8%
- Expenses: 0.22%
Vanguard Long-Term Investment Grade Fund Investor (VWESX, $10.55) puts the brainpower of Wellington Management and Vanguard to work selecting a portfolio of high-yielding long-term bonds. And it does so for a song.
"Despite being actively co-managed by Wellington and Vanguard's Fixed Income group, VWETX charges a 0.12% expense ratio that is much cheaper than the 0.77% for credit-focused fixed income mutual fund peers," Rosenbluth says.
Like VLTCX, VWESX is concentrated on long-term bonds, with an average maturity of 22 years. But while high-quality corporates are the core of this portfolio, it also will hold a small number of taxable muni bonds. Credit quality is higher, too, with just 6% of holdings carrying a BBB rating, 64% at A and the rest above.
Again, current market and economic conditions don't favor long-term bonds, nor the Vanguard dividend and income funds that hold them. But VWESX has beaten both the category average and its benchmark over longer-term (10 and 15 year) time horizons, thanks in part to that high credit quality.
"The strong risk profile and modest costs contribute favorably to CFRA's five-star rating," Rosenbluth says.
Learn more about VWESX at the Vanguard provider site.
