I last covered the Vanguard Dividend Appreciation Index Fund ETF (NYSEARCA:VIG), the largest dividend growth ETF in the market, in late 2022. In that article, I argued that VIG seemed fairly valued, and expected similar performance to that of the S&P 500. VIG has underperformed expectations since, somewhat significantly so:
Due to the above, VIG now trades with a somewhat more compelling valuation, at least relative to the S&P 500. Longer-term returns are strong, with VIG outperforming since I first covered the fund. VIG's slightly cheap valuation, strong performance track-record, and overall solid fundamentals make the fund a buy. On a more negative note, the fund's 1.8% yield is quite low, and so the fund barely qualifies as a dividend ETF, strong growth notwithstanding.
VIG - Basics
- Investment Manager: Vanguard
- Underlying Index: S&P U.S. Dividend Growers Index.
- Expense Ratio: 0.06%
- Dividend Yield: 1.76%
- Total Returns CAGR 10Y: 11.3%
VIG - Overview and Analysis
Index and Portfolio
VIG is a simple dividend growth index ETF, tracking the S&P U.S. Dividend Growers Index. Said index includes U.S. equities with at least 10 consecutive years of dividend growth, subject to a basic set of inclusion criteria. It explicitly excludes the top 25 highest-yielding companies, a measure meant to reduce risk (high yielding companies are generally risky companies). It is a market-cap weighted index, with security caps meant to ensure diversification. It is a reasonable, broad-based index, with no material negatives or issues, in my opinion at least.
VIG's underlying index is quite broad, which results in a well-diversified fund, with investments in over 300 securities from all relevant industry segments. Diversification seems comparable to that of broader equity indexes, including the S&P 500 and Nasdaq-100. Concentration is about average, with the fund's top ten holdings accounting for 32.0% of its portfolio, approximately the same figure as the S&P 500. VIG's largest holdings are also similar to those of the index, but not identical. These are as follows.
Looking at individual holdings, VIG excludes Tesla (TSLA), Nvidia (NVDA) and, presumably, other incredibly expensive growth stocks.
VIG's sector weights are as follows.
As is the case for most dividend ETFs, VIG is overweight old-economy industries, including financials and consumer staples, as many companies within these industries have long dividend growth track-records. On the flipside, the fund is underweight communication services, tech, and growth, for the opposite reasons. VIG is also slightly underweight energy, unlike most of its dividend peers, due to excluding the highest-yielding companies from its portfolio, a lot of which are energy companies.
From what I've seen, VIG's sector weights are closer to those of the S&P 500 compared to most other dividend ETFs. As an example, the Vanguard High Dividend Yield Index Fund ETF (VYM), one of VIG's larger peers, is underweight tech a whopping 19.0%, compared to 5.6% for VIG. Same is true for most other dividend ETFs and industries, although gaps do vary.
Overall, VIG's index and portfolio both seem reasonable enough, and quite similar to that of the S&P 500. Nothing inherently wrong with that, but an important fact for investors to consider.
Dividend Analysis
VIG's dividends are both higher than the equity average, but only slightly so. The fund currently yields 1.8%, compared to the S&P 500's 1.3%, and the Nasdaq's 0.64%. Although the fund's yield is higher than average, the differences are incredibly small, and not terribly material. For most income investors, I imagine that a 1.8% yield is a deal-breaker.
VIG's dividend growth track-record is quite good, and stronger than the equity average, but only slightly so. Dividends have grown at an 8.7% CAGR these past ten years, compared to 7.4% for the S&P 500. Growth has been somewhat steadier too compared to the S&P 500.
Using VOO as a proxy for the S&P 500.
VIG's starting yield is incredibly low, and although the fund's dividend growth is good, it is not great, and definitely not great enough to overcome such a low starting yield. Due to this, income received from the fund is consistently low, even for long-term investors. As an example, the fund sports a 10Y yield on cost of only 4.3%, quite low on an absolute basis, and only slightly higher than that of the S&P 500.
Most other dividend ETFs have higher yield on costs, including VYM and the Schwab U.S. Dividend Equity ETF (SCHD). SCHD's yields are particularly high, with probably the strongest combination of yield and dividend growth in the market these past ten years.
As VIG's dividends are higher than the equity average, these are objectively a benefit and advantage of the fund. As dividends are barely higher than those of the S&P 500, these are a tiny benefit, and not terribly important, in my opinion at least.
Overall, I think that most income and dividend growth investors would prefer other funds. SCHD and VYM are the obvious choices. Bond funds are a solid alternative too, especially for those looking for higher yields right now, not ten years from now.
Valuation Analysis
VIG's valuation seems comparable to that of the S&P 500, with a lower PE and PS ratio, but higher PB and P/CF metrics. Differences are moderate. SCHD and VYM are both much cheaper than both the fund and the index.
Performance Analysis
VIG's performance track-record seems somewhere between good and adequate. VIG tends to slightly outperform most of its peers, sometimes matching their performance instead. Long-term returns are comparable to those of SCHD, one of the best-performing dividend ETFs. Returns have been slightly stronger these past few years, however. Long-term returns are slightly lower than those of the S&P 500, almost entirely due to significant tech outperformance in prior years.
Although the figures above are accurate, I believe they understate VIG's performance. The fund has performed quite well since the pandemic, especially during 2022. VIG has outperformed the S&P 500 since I first covered the fund in 2021, outperformed since my follow-up coverage in early 2022, but underperformed since my most recent article in late 2022. Two out of three seems reasonably good, and much better than the table above.
VIG's performance has improved these past few years as tech/growth valuations seem to have plateaued, at least relative to value. Corollary of this is that VIG underperformed as tech valuations soared in prior years.
In my opinion, and considering the above, VIG's prior underperformance is not a significant issue or negative.
Conclusion
VIG's slightly cheap valuation, strong performance track-record, and overall solid fundamentals make the fund a buy.
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