A Growth-Oriented Foreign Dividend Fund

High-quality companies often have a defensive bent, making them a welcome addition to a diversified portfolio. They tend to exhibit lower volatility than the market and hold up better during drawdowns. Consistent dividend growth is a good proxy for quality because it demonstrates that the business is healthy and stable, and is run by a shareholder-friendly management team.

VIGI is poised for success over the long term. This low-cost fund prioritizes dividend growth over yield, which emphasizes highly profitable firms that should hold up better than most during market downturns and offer attractive long-term returns. However, its short track record limits its Morningstar Analyst Rating to Bronze.

The fund invests in large- and mid-cap stocks from developed and emerging markets, and targets those that have increased their dividend payments for seven consecutive years. It then applies additional filters to eliminate stocks that may not be able to sustain their dividend growth. The portfolio weights its holdings by market capitalization to help mitigate turnover and trading costs. Individual stocks are limited to 4% of the portfolio at the annual rebalance to improve diversification.

Many foreign stocks tie their dividend payments to earnings. Therefore, companies that have a history of increasing their dividend payments are also likely to be those that have been consistently growing profitably. These stable businesses should be less volatile than the broader market and are likely to hold up better during market downturns.

Screening for stocks with seven years of dividend growth is a strict hurdle. This criterion captures companies that not only have the capacity to make dividend payments but also a willingness to do so. However, it does not look at other metrics, such as debt levels and analyst earnings growth estimates, which may be indicative of a firm’s capacity to continue making payments. Additionally, if a company were to miss a single dividend payment it must wait seven years before being welcomed back.

This fund was launched in February 2016 and has not had sufficient time to build a meaningful record. It should hold up better than many of its Morningstar Category peers when the broader market goes through a downturn but lag during periods of strong performance. Its risk-adjusted returns were in the bottom third of the category between March 2016 and May 2018.

Fundamental View This strategy focuses on dividend growth, which emphasizes companies that tend to be more stable than the broader market. Strategies that invest in highly profitable companies have sound investment merit. In his 2012 paper "The Other Side of Value," Robert Novy-Marx demonstrated that profitable firms have historically outperformed unprofitable firms and are less prone to distress.

The fund requires constituents have at least seven consecutive years of increased regular dividend payments. This is somewhat relaxed from the U.S. version of this strategy,

Firms that make the cut tend to be more profitable and generate more consistent earnings growth than average. As a result, this fund is skewed toward those from stable sectors such as consumer staples. Top holdings include major multinational firms including

This fund’s focus on dividend growth makes it significantly different from those that emphasize dividend yield. A narrow focus on yield brings about certain risks because high yields can be an indicator of firms that may be in financial distress or have poor forward-looking prospects. These stocks trade at lower prices relative to dividends paid and can be risky. Other high-yielding stocks may be paying out a large fraction of their earnings. These companies may be at risk of cutting their dividends because increasing payments in the future is unsustainable. Funds that hold these stocks tend to be more value-oriented and more volatile than a broad market-cap-weighted index.

About one fourth of this portfolio is invested in emerging-markets stocks. These holdings can be subject to various risks that threaten business growth and stability, making them more volatile than their developed-markets peers. These include poorly maintained infrastructure and undeveloped regulatory systems.

Portfolio Construction This fund tracks the Nasdaq International Dividend Achievers Select Index, which targets companies that have a strong history of raising their dividend payments. Its market-cap-weighted approach further emphasizes large stable firms while mitigating turnover and trading costs, and supports a Positive Process rating.

The selection universe for this index starts with stocks listed in the Nasdaq Global Ex-U.S. Index and includes those listed in both developed and emerging markets. The process excludes REITs and companies that are currently working through bankruptcy proceedings. It applies additional liquidity screens to ensure potential holdings are investable. The methodology further narrows down its selection to companies that have a seven-year history of increasing regular dividend payments. Nasdaq applies some additional proprietary filters intended to improve the fund’s chances of holding companies that will continue to grow their dividends. Stocks that meet these criteria are weighted by market capitalization, subject to a 4% maximum weighting at the time of the rebalance. The index is reconstituted annually in March, and the managers use full replication to fulfill their index-tracking objective.

Fees Vanguard offers this fund through three share classes. It charges 0.35% for the Investor shares, while Admiral shares and the ETF both cost 0.25%. These fees all land in the bottom decile of the foreign large growth Morningstar Category, and earn a Positive Price Pillar rating. Investor shares have a $3,000 investment minimum and Admiral shares require $10,000. The Investor and Admiral shares also charge a 0.25% purchase and redemption fee. The total returns of the Admiral share class lagged its target index by 0.27% annually between Feb. 26, 2016, and May 2018, an amount comparable to its expenses.

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