Thursday, January 24, 2013

Examining Vanguard's Top Dividend Funds

The Vanguard Group operates two of the most invested-in and interesting dividend paying ETFs:

Vanguard Dividend Appreciation (VIG)
Vanguard High Dividend Yield (VYM)

While both funds are focused on providing a dividend, their differing investment strategies and underlying indexes have produced an interesting divide amongst investors.

VIG is designed to follow Mergent, Inc.’s Divided Achievers Select Index, which is comprised of common stocks of companies that have a record of increasing their dividends over time.  This strategy is very alluring to investors who want consistent, ever improving performance while still maintaining a moderate risk for capital gains.

VYM on the other hand is programmed to follow FTSE’s High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by higher than average dividend yields.  Excellent for investors seeking a greater payout while still maintaining the stability and consistency of a large diversified fund.

Thus the divide is forged.  High yield/slightly higher risk vs. consistent yield/slightly lower risk.  It would be easy to simply take these descriptions and run, but to us these two strategies produce a couple of must-answer questions:

  • Does VIG’s dividend actually and consistently appreciate as promised?
  • How much higher is VYM’s yield than VIG’s, if at all?
  • Could VYM’s dividend be appreciating at the same rate, or faster, than VIG’s?
  • How well do these funds’ portfolios weather market crashes?

Luckily for us there already exists a dividend paying benchmark for essentially all large diversified funds.  Any guesses?!  Yes…the S&P 500, however the closest we can get to owning all 500 stocks without devoting all day to trading is SPDR’s S&P 500 ETF (SPY).

Dividend Appreciation:
In order to fully gauge VIG’s degree of dividend appreciation we need to plot its yield versus the S&P 500’s and against its “moral” competitor:

Note: Spikes in yield are the result of overlapping dividend payments within a time-range, Ulmer Scientific chooses not to modify raw data or smooth out these spikes.

To determine “appreciation” we’ve fitted a linear regression to each plot, shown in the table below:

Dividend Yield Analysis as of 23JAN2013
Fitted Linear Dividend Growth:

We can see VIG’s dividend has indeed appreciated, faster so than the S&P 500’s and with less volatility!  However, notice VYM for almost the same period has appreciated 0.08%/yr more; and done it with only slightly more volatility.  This could mean trouble for VIG, not enough dividend growth will keep it forever lagging behind higher-yield funds, even when the markets are down.

Recession Proofing:
Given the fundamentals of these funds there is probably some ugly calculus we could attempt to figure at what point either fund would come out on top given some recession scenario… Or lucky for us, we can just look back at late 2008.  Measuring the APY-to-Date for these funds produces an interesting plot:

When market conditions are favorable (i.e. post-2008), VYM’s higher yield allows it to shine above the rest.  However when the market dips, it appears VIG’s conservative strategy and solid dividend allows it to better weather the storm; yielding higher returns than either the market or VYM.  Where the hard math comes in now is figuring how long between market pull-backs will it take for VYM to outpace VIG in the long run?  Interesting indeed.

1 comment:

  1. Very interesting read. I was looking for something like this! Thanks.