Welcome to the fourth episode of my dividend ETF evaluation collection; right now we’re VIG, Vanguard’s Dividend Appreciation ETF.

Yow will discover all the opposite ETFs lined on this collection right here. As all the time, we’ll check out how VIG is constructed, its efficiency and dividend progress historical past and the way that compares in opposition to others on this realm.

If there’s any particular ETFs you need reviewed, let me know, however in any other case, let’s leap straight into it.

VIG Particulars

In line with Vanguard, VIG emphasizes shares with a document of rising dividends 12 months over 12 months.

Similar to DGRO, the main focus right here gained’t be yield however dividend progress so it’ll be attention-grabbing to see how this one compares in opposition to different progress centered ETFs. The great factor about VIG is that it has been round for fairly a while and has handed by a recession similar to VYM in order that sort of longevity is superior.

You possibly can see the excessive degree particulars of VIG beneath and might all the time discover the most recent data on all of the ETFs on this collection on this spreadsheet.

VIG follows a passive technique so the expense ratio is kind of low.

Given it’s longevity and the Vanguard identify, additionally it is the most important dividend centered by property beneath administration which implies there aren’t any points with spreads or quantity.

That longevity goes to be useful in establishing long run efficiency and provides it extra credibility in that regard. A few of these different dividend ETFs got here into existence in current reminiscence which implies they’ve extra uncertainty round what would possibly occur throughout a recession whereas this one already lived by a kind of. It’ll be attention-grabbing to see how VIG carried out in the course of the 2008 recession and the way the dividend progress appeared.

Primarily based on the most recent 12 months of dividends, the present yield of two.06% is low however a good deal higher than the 5 12 months common. The inventory presently sits practically 19.5% beneath its 52 week excessive which probably performs into that increased yield. This isn’t a excessive yield centered ETF however hopefully the expansion fee will probably be stable as that’ll be much more necessary in a rising bond yield atmosphere.

Earlier than we dive into that, let’s have a look at how this ETF comes collectively.

Portfolio Building

To maintain the expense ratio low, VIG follows a passive replication technique tying itself to the S&P U.S. Dividend Growers Index.

The place to begin for that index is the S&P United States BMI which incorporates all U.S. domiciled corporations above a $100M market cap which meet median worth traded necessities. That 3400 constituent grouping is whittled down by way of the beneath standards.

  • All REITs are eliminated.
  • The three month each day worth traded threshold should be $1M for brand spanking new entrants and $500,000 for present constituents.
  • Corporations should have elevated dividends for at the least 10 years.

The three standards are fairly easy. The primary is frequent in lots of dividend ETFs and is pushed by the necessity for tax effectivity. The second is there to ensure these corporations aren’t too thinly traded which makes shopping for and promoting simpler on a bigger scale. And the third and sure most necessary, is to ensure these are literally dividend growers.

From these corporations, the highest 25% of corporations highest ranked by dividend yield are eliminated. This probably exists to maintain excessive yielding however low rising corporations out of the index and to cut back the probabilities of future dividend cuts as these corporations could also be extra probably to do this. That 25% reduce off level is 15% for corporations already within the index at reconstitution.

Dividends on this case are common dividends with particular dividends not being thought of and dividend initiation or re-initiation not counting as a dividend improve. This makes positive that corporations even have to extend common dividends throughout a full interval of 10 years to be included.

Spin-offs are given the historical past of their father or mother firm till two full calendar years of dividends can be found for all put up spin-off corporations and subsequent dividend comparisons are based mostly on the annual dividend quantities of the spun-off corporations.

The index is reconstituted yearly. Constituents are market cap weighted topic to a single inventory weight cap of 4%. It will maintain the index massive cap heavy basically and is designed to maintain it much less risky.

No additions are made outdoors of the annual reconstitution interval, however the weighing does get up to date quarterly.

The index could make month-to-month changes if a scheduled dividend cost is omitted, or an organization broadcasts it’s going to stop paying dividends for an undetermined time frame, or an organization broadcasts a decreased dividend and the S&P determines that as a result of these the corporate would now not qualify for the index at annual reconstitution time.

Total, this looks as if a easy however stable option to assemble a portfolio. It focuses on 10+ 12 months dividend growers excluding the 25% prime yielding shares. The exclusion of all the prime 25% yielding corporations is a bit aggressive and I’d desire they do some further testing to quantify the standard of these corporations. There would possibly nonetheless be corporations with a secure dividend and a good progress fee in that grouping.

I additionally just like the month-to-month changes which can take away corporations that will overwhelm the expansion fee rapidly and reallocate the cash to different corporations. This might assist throughout a time frame when many corporations reduce dividends and hopefully reveals up within the outcomes during times of bother.

All of those changes convey down the portfolio from the 3400 beginning constituents to 289.

Data expertise, well being care and financials make up the highest 3 sectors with utilities, communication companies, and vitality mentioning the rear.

The highest 10 names make up 28.87% of the portfolio and included a couple of distinctive names with regards to these dividend ETFs like UnitedHealth Group, the #1 holding. Microsoft, Johnson & Johnson, Proctor & Gamble, JP Morgan Chase, Visa, Residence Depot, Mastercard, Coca-Cola and PepsiCo spherical up the highest 10.

All in all, this looks as if a stable sufficient option to go about making a portfolio however on condition that there aren’t any progress necessities(past elevating a dividend), it might not result in wonderful progress charges. Nonetheless, hopefully the index’s fast reactions to dividend cuts may imply it does properly during times of difficultly like 2008 or 2020.

Dividend Progress and Historical past

VIG Is dividend progress centered ETF so the purpose right here is stable progress. We’ve received a couple of comparable ETFs already so it’ll be good to see how VIG fares in opposition to these.

The great factor right here is that we even have long run information so it’ll be good to see how this did over the past recession.

The primary full 12 months of information is 2007 in order that’s the place the graph beneath begins.

VIG

The story right here is stable. You possibly can see stable progress throughout most years with a couple of dips right here and there. The 2009 dip is very spectacular on condition that VYM dropped like a brick throughout that point.

I’ll word that the information right here may not be 100% dependable as I supply these from quite a lot of sources and one of many many sources confirmed a missed cost throughout 2009 which might convey the expansion fee down. Nonetheless, each different supply had all 4 quarterly funds. Sadly Vanguard, for no matter cause, doesn’t provide information that far again which is annoying.

From a progress fee perspective, you possibly can see how that 2009 discount compares to one thing like VYM which dropped practically 20% alongside the identical line as SPY, the S&P 500 ETF.

VIG Growth

You possibly can see {that a} -4.6% drop is fairly spectacular adopted by stable progress within the years forward. That’s fairly large given the reductions different ETFs noticed in that very same timeframe and sure one of many causes this ETF is so properly favored.

What makes that 4.6% drop potential? One cause is that it’s potential that the month-to-month reconstitution permits it to rapidly react to corporations that did reduce dividends in order that they don’t overwhelm the general efficiency for the 12 months. Another excuse is the ten 12 months dividend progress requirement which implies that corporations within the index as of 2009 already went by one other recession in 2000 which may assist.

We did see a small discount in 2013 which is a bit odd however probably an element of some increased yield names being eliminated for some cause. There weren’t any particular occasions I may level that made that 12 months stand out and most different dividend ETFs did properly throughout that interval.

Whereas post-recession progress was nice, the expansion after 2016 has actually slowed though it did tick up in 2021.

We did see progress in 2020 which is according to all the opposite dividend ETFs we’ve reviewed however a constructive on condition that an S&P 500 ETF like VOO noticed a 4.8% drop.

The total progress fee for VIG because it began has been 8.3%. That compares favorably to VYM’s 6.1% in that very same timeframe and SPY’s 5.5%. These are the one two ETFs that go that far again.

If we stay up for progress since 2015, the place we have now extra comparable ETFs, the expansion fee slows to six.5%. That’s not superb for a progress centered ETF. If we have a look at those we’ve reviewed to date, VIG rests close to the again of the pack.

It’s not a really spectacular progress fee for one thing that’s supposedly centered on progress.

Nonetheless the truth that we noticed such a small discount in 2009 is an enormous enhance to this ETF. Progress is necessary however consistency is simply as necessary and the power of this ETF to not fall a ton in the course of the 2008 recession is fairly spectacular.

It’ll be attention-grabbing to see how this impacts efficiency particularly throughout that very same recession so let’s check out that.

Efficiency

As a result of VIG’s longevity, let’s check out how this sucker compares to the ETFs that run that far again.

To maintain it easy, the information right here begins in January 2007 and ends in August 2022 and reveals $10,000 invested in the beginning with dividends re-invested.

VIG is correct according to the S&P 500 and about 1% higher than VYM. VIG additionally has the bottom loss in its worst 12 months which is all the time good to see.

On prime of that, the max drawdown whereas nonetheless massive and occurring in the course of the 2008 recession is much better than each VYM and the S&P 500. That’s a uncommon occasion as most of those dividend ETFs have had max drawdowns which were according to the S&P 500.

Perhaps one of many causes it did significantly better is that consistency in dividends as a result of VYM definitely didn’t fare as properly.

You possibly can see that annual efficiency right here.

The efficiency in 2008 appears to be like so significantly better than the others. It’s bizarre to say {that a} close to 27% loss is so significantly better however throughout a recession you are taking what you may get.

What’s attention-grabbing is that to date in 2021, VIG hasn’t fared in addition to a few of it’s brethren. As of 9/28/22, whereas its 19.5% discount from its 52 week excessive is best than the S&P 500s 22.8% discount, VYM has finished higher with a 15.5% discount from the 52 week excessive.

Each DGRO and SCHD had finished higher as properly with a 18.8% and 17.2% discount respectively.

Talking of these different ETFs, let’s see how VIG carried out in opposition to these. The information right here will symbolize the identical $10,000 invested with dividends re-invested and run from July 2014 to August 2022 as a result of DGRO didn’t exist previous to that.

Right here VIG has carried out comparatively properly even when it trails SCHD and DGRO in CAGR. Whereas its worst 12 months is worse than the opposite two(and all have gotten even worse for the reason that information doesn’t embody September), the max drawdown is equally higher.

Whereas the efficiency is over 1% worse than SCHD, it’s nonetheless inside an inexpensive distance and the improved max drawdown reveals a barely higher security profile than the opposite ETFs. Whereas many usually assume that dividend ETFs do higher than different fairness varieties throughout turbulent instances, the max drawdowns to date haven’t confirmed that to be true(though the worst years have been higher basically).

It’s good to see an ETF now that does have higher efficiency throughout the board with regards to that max drawdown. Nonetheless, it’s not like these numbers are all that good as a result of a 40% discount in the course of the 2008 recession remains to be fairly unhealthy and speaks to the general danger with equities.

Now that we’ve received a interval of rising charges and higher bond yields, shares are getting hit and yield on these dividend ETFs begins to look a bit much less enticing in relation to different choices.

It’ll be attention-grabbing to see how the market progresses and whether or not VIG can maintain its degree of outperformance in unhealthy instances if the bear market stretches additional than right now.

On the earnings aspect, one of many advantages on a dividend ETF like VIG over a bond is that the earnings will proceed to develop as seen beneath.

VIG

You could possibly get first rate bond charges right now however these bond charges will probably be locked for the time period of the bond. VIG and different dividend ETFs would possibly begin decrease right now however will continue to grow by the years and bettering the yield on value and that may be particularly extra pronounced if inflation stays elevated.

Somebody who purchased VIG in 2015 would have paid round $80 or a sub 2% yield on the time. Primarily based on the final twelve months of payout, that yield on value can be 3.6%.

For a progress ETF, that’s not an excessively spectacular distinction as buyers would have finished higher on a yield on value foundation with SCHD or DGRO as proven within the graph above. The affect is most clear with SCHD as that graph begins only a bit above VIG in 2015 however is sort of double by 2021. That’ll occur when your progress fee lags and that decrease progress fee compounded throughout a number of years could make an enormous distinction.

 

VIG Overview, Valuation and Scorecard

VIG is the most important dividend ETF on the market and one with loads of historical past.

Similar to VYM, it’s a mixture of the Vanguard identify, a low expense ratio and a superb monitor document and longevity.

This isn’t a excessive yielding identify, yielding simply 2.06% as of 9/28/22 so the secret must be progress.

Nonetheless, whereas its 8.3% progress fee since inception is best than VYM and the S&P throughout that interval, its progress fee lately could be very missing. The 6.5% progress fee since 2015 is barely above VYM’s 6.3% progress fee in that very same timeframe and far decrease than extra progress centered ETFs like DGRO and even SCHD. Slightly disappointing for one of these ETF.

Nonetheless, the truth that these dividends didn’t see an enormous reduce in 2009 is an enormous boon for somebody who’s searching for a bit extra security of their dividends though the longer term is a little more murky particularly since we’re greater than 10 years away from a recession and dividend cuts haven’t been too frequent since then which can cut back the possibilities that this one does in addition to it did again in 2008 which was lower than 10 years away from one other recession.

On the efficiency aspect, the long run monitor document is just like the S&P 500 with a smaller max drawdown and higher efficiency over the past recession. In newer instances, efficiency has lagged different dividend ETFs like DGRO or SCHD however the distinction wasn’t huge and one good 12 months may change that.

From a valuation perspective, VIG has been hit similar to all different names this 12 months. It presently sits 19.47% beneath its 52 week excessive and has dropped a bit greater than the comparable ETFs we’ve reviewed already. You possibly can all the time see the freshest data on this google spreadsheet.

That places it at a P/E of 18.92 which is increased than the 18.79 of the S&P 500 and a superb deal increased than the 13.7 you get from SCHD right now. That’s not overly engaging however that is an ETF that has extra progress names(in earnings not dividends) than among the different ones.

It’s yield of two.06% isn’t spectacular and until progress picks up, will proceed to lag among the increased rising names like DGRO and SCHD. Nonetheless, this isn’t an ETF that goes properly above this quantity and the typical yield within the final 5 years has been 1.77%.

Nonetheless, for those who have a look at it additional again, it is a fund that has finished properly lately by way of value which has pushed the yield down and there have been alternatives earlier than then to get it at the next yield.

Now that various yields are rising, perhaps that is one which corrects a bit and permits buyers to select it up at a extra affordable valuation.

Total, VIG is a reasonably first rate ETF however it does appear to lack in progress which is its namesake. It’s arduous to be tremendous comfortable a couple of dividend appreciation ETF that fails to understand properly by way of dividend payouts. The efficiency, nevertheless, has been stable and that’s very true with regards to the efficiency over the past recession.

There’s definitely a monitor document right here that reveals why this ETF has been so engaging to buyers who desire a bit extra security. Security is relative because it nonetheless dropped over 40% over the past recession however noticed much less in dividend cuts than different ETFs.

Nonetheless, given its lack of progress and just below common efficiency, I can’t assist however knock it on the utterly made up scorecard.

The fee construction and longevity are incredible however dividend yield and particularly progress are nothing to put in writing dwelling about. Right this moment’s valuation is a bit richer than among the different ETFs we’ve checked out even after the larger drop than among the different ETFs this 12 months.

Efficiency will get a little bit of a lift as a result of the way it did in the course of the 2008 recession as total efficiency since then has lagged ETFs like SCHD or DGRO. It’ll be attention-grabbing to see how VIG does if there’s one other recession forward of us as its finished barely worse on this most up-to-date bear market.

Nonetheless, if it may possibly proceed avoiding these dividend cuts prefer it did in the course of the 2008 recession, that may be sufficient to maintain it above the pack when in comparison with different ETFs.

For me, the valuation isn’t overly engaging proper now and whereas I personal VIG, I purchased my shares means means again and haven’t actually added since as different ETFs appeared extra engaging. The information proves out that was the best transfer as efficiency has been a little bit of a laggard and dividend progress has lagged for a progress based mostly ETF.

Nonetheless, that is one I might probably begin shopping for as yield retains rising due its longevity and good historical past throughout a recession however it might take a 2.5%+ yield for me to get considering it once more and perhaps even increased if bond yields maintain rising. We’ll see if that ever occurs as this one hardly ever hits that degree and perhaps there’s a cause for it.

Thanks for studying and as all the time let me know your ideas and for those who’d need me to evaluation some particular dividend ETFs on this format. As it is a new collection, I’m undoubtedly searching for extra suggestions.

Disclosure : I’m lengthy VIG, SCHD, DGRO, VYM and perhaps be lengthy different shares mentioned on this article. This isn’t funding recommendation and I’m not a monetary advisor. Please speak to knowledgeable earlier than investing as any investments include danger of loss, generally everlasting. This weblog is for leisure functions solely. Returns symbolize previous efficiency and are usually not a assure of future efficiency.

Similar Posts

Leave a Reply

Your email address will not be published.