Vanguard Dividend Growth's Closure Sparks Change in Bucket Portfolios

On July 28, Vanguard announced the closure of the Gold-rated

, Vanguard CEO Bill McNabb says the firm was closing the fund "to help ensure that the advisor's ability to produce competitive long-term results for investors is not compromised."

To be sure, the fund has performed extremely well under manager Don Kilbride of Wellington Management. While he invests in mega-cap blue chips, he maintains a fairly compact portfolio of 45-55 names. It's encouraging that Vanguard closed the fund rather than forcing Kilbride into a more diffuse portfolio or adding another subadvisor to the mix.

Morningstar maintains a strong recommendation of the fund; it's Gold-rated thanks to its combination of topflight management, sensible strategy, and low price tag, among other attributes. I employed it as the core equity holding in my model mutual fund "bucket" portfolios--geared toward retirees--when I launched those portfolios in the summer of 2012. (You can find the complete list of model portfolios for both retirees and retirement savers here.) While the fund's dividend isn't high in absolute terms (in fact, it's lower than the S&P 500's currently), its focus on companies that have raised their dividends and are likely to continue to do so anchors it in high-quality wide-moat firms with healthy balance sheets. Because its holdings offer better downside protection than the broad market, I view it as an ideal core position for retiree portfolios. That stability was on display in 2008, when the fund lost more than 10 percentage points less than the S&P 500, and again in 2015, when the fund managed a 3% return even as the S&P 500 barely made it into the black.

Needless to say, investors who already own the fund have no reason to jettison it; its closure should make them like it even more. But what about retirees who are still in the process of putting together their in-retirement portfolios and would like to use the bucket portfolios as a guide? I've decided to swap in

From a portfolio standpoint, the swap gives the model mutual fund portfolios a bit more of a value orientation (36% of equity assets in the value column of the style box, versus 26% for the original portfolio) and a bit more in small- and mid-cap stocks. The style box positioning of these portfolios now looks more like the broad market; they skew less heavily to large-blend and -growth stocks than they did when Vanguard Dividend Growth was the core equity position. Given how many moving parts are in the portfolios, however, those variances shouldn't have a huge impact on their performance.

Investors can see all of the model portfolios via here, but below is a look at the Moderate Bucket portfolio with Vanguard Dividend Appreciation in the mix.

Bucket 1: Years 1-2 10%: Cash

Bucket 2: Years 3-10

10%:

5%:

15%:

5%: Vanguard Short-Term Inflation-Protected Securities VTIPX

5%:

Bucket 3: Years 11 and Beyond

20%: Vanguard Dividend Appreciation VDADX

10%:

10%:

5%:

5%:

Alternatives While I'm satisfied with Vanguard Dividend Appreciation as the linchpin equity holding in these portfolios, it's not the only option. Retired investors could also consider the following avenues.

Option 1: Simplify. In my bucket portfolios, I employ a total U.S. stock market fund alongside the dividend-growth option; while the dividend-growth fund helps reduce the portfolio's volatility, the total market index supplies exposure to sectors the dividend-focused fund is light on, such as technology. However, a retiree who's seeking simplicity and willing to put up with more volatility from her equity holdings could reasonably use the total stock market index as her sole U.S. equity fund.

Option 2: Go with another active option.

For investors who like a dividend growth component to their portfolios but want an active approach, the Silver-rated

and

portfolios, and it would be just fine here, too. In contrast with Vanguard Dividend Growth, which had roughly $31 billion in assets upon its recent closing, the T. Rowe fund has less than $6 billion in assets; senior analyst Katie Reichart notes that capacity constraints won't be an issue any time soon.

Option 3: Employ more of an income focus.

Finally, investors who would like their portfolios to provide a higher level of income might consider an equity option with a more explicit focus on high dividends. On the actively managed side,

, it's a high-quality option among the yield-focused products.