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Top Alternatives to Now-Closed Vanguard Dividend Growth

Active and index dividend-growth options for investors who are on the outside looking in.

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Investors have been shunning actively managed funds: For the one-year period through June 2016, they've yanked an estimated $317 billion from vehicles run by active stock-pickers, according to Morningstar's latest fund flow data. U.S. equity funds run by active stock-pickers have experienced the bulk of those outflows, shedding $192 billion in assets over the past year.

But some active U.S. stock funds have bucked the trend, including  Vanguard Dividend Growth (VDIGX). The fund's asset base has nearly quadrupled over the past five years, prompting Vanguard to close its doors to new investors last Friday. While the fund is still accepting new dollars from existing fundholders, Vanguard said the "soft close" was driven by a desire to protect the manager's ability to deliver superior results for current shareholders.

Investors who already own the fund can take comfort in the fact that their holding has experienced management, a sensible strategy, ultralow costs, and strong stewardship. (Morningstar analysts often view an asset manager's willingness to close a fund to new investors as an indication of strong stewardship.) But what about investors who are on the outside looking in?

First, it's important to have reasonable expectations for dividend-growth strategies at large. As Morningstar's resident dividend guru Josh Peters discussed in a recent article, dividend-growth strategies have enjoyed a "golden era" since 2003. He noted that dividend growth since 2003 has averaged a whopping 5.9% per year, adjusted for inflation. He's not sanguine about its persistence, however: Dividend growth has begun to slump, thanks to slowing earnings growth; many companies recognize that continuing to increase dividends could imperil their future profitability.

That's not to suggest that dividend-growth strategies can't still be useful in investor portfolios, however. The cross-section of companies with a history of dividend growth tend to be high-quality, wide-moat firms that hold up better than the broad market in equity sell-offs due to the consistency of their businesses. Such firms' ability to hold up well on the downside is likely to persist even if dividend growth continues to decelerate.

Assuming an investor would still like to obtain dividend-growth exposure, there are a few key avenues, both active and index. Here are some of the best choices available today, according to Morningstar's manager research analysts. Note that Morningstar doesn't field a "Dividend Growth" category; rather, most of these funds reside in Morningstar's large-cap blend or value categories.

Actively Managed Options

 T. Rowe Price Dividend Growth (PRDGX)
Category: Large Blend
Analyst Rating: Silver

Among still-open actively managed no-load funds focused on dividend growers, this fund is one of the most worthy options. Senior analyst Katie Reichart points to manager Tom Huber's 16-year tenure; prudent, well-diversified approach; and reasonable costs as key selling points. She also notes that the fund has a history of holding up well when the going gets tough for the broad market: It lost less than the S&P 500 in 2008 and also did so in the market blip in 2015's third quarter. This fund has experienced decent asset growth recently, too, but as a large-cap fund with less than $6 billion in assets, Huber isn't likely to run into capacity constraints any time soon.

 JPMorgan Equity Income (OIEIX)
Category: Large Blend
Analyst Rating: Silver

Like other dividend-growth funds, this offering's yield is underwhelming in absolute terms; at 1.9%, its SEC yield is lower than the S&P 500's. But longtime lead manager Clare Hart's strategy is just as focused on company quality as she is yield; senior analyst Laura Lallos notes that Hart looks for companies with durable franchises, consistent earnings patterns (so they won't have to slash their dividends in a weak economy), and conservative financials. With nearly $13 billion in assets, the fund is far from nimble; investors have no doubt been attracted to its strong record, among other attributes. But Hart's focus on large caps should allow it room to maneuver. The fund is available without a load on supermarket platforms like Schwab's.

Index Funds

 Vanguard Dividend Appreciation (VDADX) or (VIG)
Category: Large Blend
Analyst Rating: Gold

I used this fund in my model portfolios that had previously relied on Vanguard Dividend Growth as a core holding. While its performance hasn't been quite as impressive as its actively managed counterpart, it too earns a Gold rating on the strength of Vanguard's indexing prowess, very low costs, and decent performance. It tracks the Nasdaq U.S. Dividend Achievers Index, which focuses on the subset of U.S. stocks that have increased their dividends in each of the past 10 years and clear liquidity hurdles. While it doesn't have the same flexibility as active funds, it has posted strong performance thus far. It's available as either a traditional mutual fund or as an exchange-traded fund.

 Schwab US Dividend Equity ETF (SCHD)
Category: Large Value
Analyst Rating: N/A

With an expense ratio of just 0.07%, this ETF has even lower costs than the Vanguard fund. Its index, the Dow Jones U.S. Dividend 100, is focused on the subset of companies that have paid dividends in each of the past 10 years; companies must also pass muster on fundamental measures such as profitability, dividend yield, and dividend growth. Like the aforementioned funds, the portfolio has a high-quality feel; nearly two thirds of the portfolio resides in wide-moat stocks. The fund hasn't been around for a complete market cycle, but the index it tracks performed better, based on back tests, than the S&P 500 during the bear market of 2008-2009. 

Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.