Thu, 10 Mar 2016
Although both Vanguard funds are rated Gold, Dividend Growth is an active strategy with more flexibility, while Dividend Appreciation is a passive fund with rock-bottom costs.
Alex Bryan: Vanguard Dividend Growth (VDIGX) and Vanguard Dividend Appreciation (VDAIX) offer low-cost exposure to stocks with strong records of dividend growth. These are really more quality- than income-oriented strategies. In fact, their dividend yields aren't that much different from the S&P 500's. They both have heavy exposure to stocks with durable competitive advantages, have tended to outperform during market downturns, and carry Morningstar Analyst Ratings of Gold. But there are some important distinctions that make Vanguard Dividend Growth a slightly more compelling choice.
Vanguard Dividend Growth is actively managed, whereas Vanguard Dividend Appreciation tracks an index that includes stocks that have raised their dividends in each of the past 10 years. It then weights these holdings based on their market capitalization. This rules-based approach mitigates the impact of manager changes, facilitates consistency, and reduces cost. This fund is available for a razor-thin 0.1% expense ratio and is available in both an ETF and mutual fund wrapper. In contrast, Vanguard Dividend Growth charges 0.32%, which is still reasonable relative to the large-blend category. For that slightly higher fee, Vanguard Dividend Growth takes qualitative considerations into account and may react to changing fundamentals in a more flexible way than its rules-based counterpart.
The lead manager of Vanguard Dividend Growth, Donald Kilbride, is specifically paid to beat Vanguard Dividend Appreciation's index. That gives Kilbride and his colleagues a nice incentive to make meaningful active bets relative to this benchmark. Only about half of the fund's assets are invested in stocks that are also included in Vanguard Dividend Appreciation. As a result of its flexibility, modest cost hurdle, and strong incentives, Vanguard Dividend Growth has beaten Vanguard Dividend Appreciation by 1.4% annually since the latter's inception in April 2006. It will likely continue to have a small edge going forward.