How to Choose Between 2 Vanguard Dividend Funds

Alec Lucas: Gold-rated Vanguard Dividend Growth and Silver-rated Vanguard Equity-Income have all the hallmarks investors should look for when considering active management. These include: veteran managers who invest alongside shareholders; strong long-term track records; modest fees; and sound strategies. 

For all their similarities, though, the two funds' differences prove most instructive. Large-blend Vanguard Dividend Growth focuses on stocks that have the best prospects for steadily increasing their dividend payouts over time. Large-value Vanguard Equity-Income also focuses dividend-paying stocks, but it does so to deliver above-average current income. This strategic distinction shows in their respective portfolios. Vanguard Dividend Growth has a significantly higher weighting in firms with wide economic moats that enable them to fend off competitors and continue to raise their dividends. 

Vanguard Equity-Income, on the other hand, has more exposure to traditional high-yield sectors like utilities and telecom. The portfolios differ in the number of stocks they hold. Vanguard Dividend Growth invests in about 50 stocks, whereas Vanguard Equity-Income is more diversified with about 180 stocks. Despite investing in over three times the number of stocks, Vanguard Equity-Income is actually a bit more top-heavy. In February 2016, its top 10 holdings accounted for nearly 31% of its assets, versus 27.5% for Vanguard Dividend Growth. The management behind the two funds account for their distinct approaches to portfolio construction. Vanguard Equity-Income is team-managed. Its overall portfolio is a combination of a diffuse sleeve run by Vanguard’s quantitative equity group and a more concentrated sleeve run by Wellington Management’s Michael Reckmeyer. Vanguard Dividend Growth, in contrast, has only one manager, Donald Kilbride, also of Wellington Management. Like his colleague, Kilbride prefers a more compact portfolio. 

In the end, both funds are great options for investors, depending on the type of dividend strategy they’re looking for.