With 10- and 30-year Treasury yields recently (and ominously) ascending to 5% (and beyond in the case of the 30-year bond) and the S&P 500’s dividend yield sliding to all-time lows, ample attention is being paid to, well, yields.
And with S&P 500 member firms consistently spending more on buybacks than on dividends, some clients and retail investors are pondering if dividend investing is even worth it anymore – a situation heightened by the fact that low- and no-yielding mega-cap growth stocks have been market leaders for extended periods of time.
Still, it’s worth acknowledging that S&P 500 payouts are growing (just not as rapidly as buybacks), indicating there’s still a compelling case for dividends and ETFs such as the Vanguard Dividend Appreciation (VIG). VIG, the largest ETF in the dividend category, has $112.7 billion in assets under management (as of Aug. 31), so its popularity and advisors’ affinity for the fund aren’t up for debate.
What’s troubling some advisors and investors is that over the past five years, the S&P 500 is up 81.32% while VIG is higher by “just” 61.77%. No, the Vanguard ETF isn’t the only dividend offender in terms of lagging the broader market, but that gap is a reminder that investors need to fully understand what they’re getting with this fund and that has plenty of perks despite the “gloominess” around dividend investing.
Payout Growth with Lower Volatility
VIG tracks the S&P US Dividend Growers Index, which is a collection of domestic dividend payers that have boosted payouts for at least 10 consecutive years. That’s a broad universe as highlighted by the fact that the ETF holds 333 stocks.
Advisors and investors shouldn’t overlook the fact that the index excludes the highest-yielding stocks in its selection universe. That’s beneficial on two fronts. High yielders do have the capacity to grow dividends, but many may be financially strained to do so, potentially leading to dividend cuts or suspensions. Second, VIG’s emphasis on financially sturdy companies leads to some favorable volatility traits.
VIG’s “risk-adjusted performance has been solid over the past decade,” notes Morningstar’s Bryan Armour. “It nearly kept pace with the return of its average peer despite 13% lower volatility, putting it ahead of its average peer in risk-adjusted terms.”
VIG’s low volatility aspect is compelling because as advisors know, there are plenty of “low vol” ETFs out there, many of which are beloved by clients and retail investors. To the Vanguard ETF’s credit, it beat the largest minimum volatility ETF by more than 2,100 basis points over the past five years.
“Lower volatility is key to this fund’s success. It tends to outperform when markets drop, like when it beat the category index by 10 percentage points in 2022,” adds Armour. “The drawback is its potential for lackluster returns when markets trend higher.”
Some Growth, Plenty of Value
Arguably, VIG is a blend fund with value tendencies as it allocates 40.3% of its weight to financial services and healthcare stocks, indicating that if value stocks can show some signs of life, this fund should benefit.
Of course, the long-awaited value recovery hasn’t materialized in earnest as of yet, but VIG defrays some of that risk because more than quarter of its holdings are tech stocks – a percentage that’s likely to increase over the long haul as more tech companies meet the 10 dividend increase streak requirement.
What is clear is that VIG is cheap (annual fee of just 0.04%) and while it hasn’t beaten the S&P 500 of late, it is one of the best-performing options over the long term in the dividend ETF category.
“Low costs provide another durable edge over competitors. Market-value-weighting and a simple, repeatable process reduce transaction costs, creating an advantage when coupled with one of the lowest fees in its category,” concludes Armour.
