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Finance

Dividend ETF Analysis – VIG

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Welcome to the fourth episode of my dividend ETF analysis series; today we’re looking at VIG, Vanguard’s Dividend Appreciation ETF.

You can find all the other ETFs covered in this series here. As always, we’ll take a look at how VIG is constructed, its performance and dividend growth history and how that compares against others in this realm.

If there’s any specific ETFs you want reviewed, let me know, but otherwise, let’s jump straight into it.

VIG Details

According to Vanguard, VIG emphasizes stocks with a record of growing dividends year over year.

Just like DGRO, the focus here won’t be yield but dividend growth so it’ll be interesting to see how this one compares against other growth focused ETFs. The nice thing about VIG is that it has been around for quite some time and has passed through a recession just like VYM so that type of longevity is awesome.

You can see the high level details of VIG below and can always find the latest information on all the ETFs in this series in this spreadsheet.

VIG follows a passive strategy so the expense ratio is quite low.

Given it’s longevity and the Vanguard name, it is also the largest dividend focused by assets under management which means there are no issues with spreads or volume.

That longevity is going to be helpful in establishing long term performance and give it more credibility in that regard. Some of these other dividend ETFs came into existence in recent memory which means they have more uncertainty around what might happen during a recession whereas this one already lived through one of those. It’ll be interesting to see how VIG performed during the 2008 recession and how the dividend growth looked.

Based on the latest 12 months of dividends, the current yield of 2.06% is low but a decent deal better than the 5 year average. The stock currently sits nearly 19.5% below its 52 week high which likely plays into that higher yield. This is not a high yield focused ETF but hopefully the growth rate will be solid as that’ll be even more important in a rising bond yield environment.

Before we dive into that, let’s look at how this ETF comes together.

Portfolio Construction

To keep the expense ratio low, VIG follows a passive replication strategy tying itself to the S&P U.S. Dividend Growers Index.

The starting point for that index is the S&P United States BMI which includes all U.S. domiciled companies above a $100M market cap which meet median value traded requirements. That 3400 constituent grouping is whittled down via the below criteria.

  • All REITs are removed.
  • The three month daily value traded threshold must be $1M for new entrants and $500,000 for current constituents.
  • Companies must have increased dividends for at least 10 years.

The three criteria are pretty simple. The first is common in many dividend ETFs and is driven by the need for tax efficiency. The second is there to make sure these companies aren’t too thinly traded which makes buying and selling easier on a larger scale. And the third and likely most important, is to make sure these are actually dividend growers.

From these companies, the top 25% of companies highest ranked by dividend yield are removed. This likely exists to keep high yielding but low growing companies out of the index and to reduce the chances of future dividend cuts as those companies may be more likely to do that. That 25% cut off point is 15% for companies already in the index at reconstitution.

Dividends in this case are regular dividends with special dividends not being considered and dividend initiation or re-initiation not counting as a dividend increase. This makes sure that companies actually have to increase regular dividends across a full period of 10 years to be included.

Spin-offs are given the history of their parent company until two full calendar years of dividends are available for all post spin-off companies and subsequent dividend comparisons are based on the annual dividend amounts of the spun-off companies.

The index is reconstituted annually. Constituents are market cap weighted subject to a single stock weight cap of 4%. This will keep the index large cap heavy in general and is designed to keep it less volatile.

No additions are made outside of the annual reconstitution period, but the weighing does get updated quarterly.

The index can make monthly adjustments if a scheduled dividend payment is omitted, or a company announces it will cease paying dividends for an undetermined period of time, or a company announces a reduced dividend and the S&P determines that due to these the company would no longer qualify for the index at annual reconstitution time.

Overall, this seems like a simple but solid way to construct a portfolio. It focuses on 10+ year dividend growers excluding the 25% top yielding stocks. The exclusion of all of the top 25% yielding companies is a bit aggressive and I’d prefer they do some additional testing to quantify the quality of those companies. There might still be companies with a safe dividend and a decent growth rate in that grouping.

I also like the monthly adjustments which may remove companies that would weigh down the growth rate quickly and reallocate the money to other companies. This could help during a period of time when many companies cut dividends and hopefully shows up in the results during periods of trouble.

All of these adjustments bring down the portfolio from the 3400 starting constituents to 289.

Information technology, health care and financials make up the top 3 sectors with utilities, communication services, and energy bringing up the rear.

The top 10 names make up 28.87% of the portfolio and included a few unique names when it comes to these dividend ETFs like UnitedHealth Group, the #1 holding. Microsoft, Johnson & Johnson, Proctor & Gamble, JP Morgan Chase, Visa, Home Depot, Mastercard, Coca-Cola and PepsiCo round up the top 10.

All in all, this seems like a solid enough way to go about creating a portfolio but given that there are no growth requirements(beyond raising a dividend), it may not lead to amazing growth rates. However, hopefully the index’s quick reactions to dividend cuts could mean it does well during periods of difficultly like 2008 or 2020.

Dividend Growth and History

VIG Is dividend growth focused ETF so the goal here is solid growth. We’ve got a few comparable ETFs already so it’ll be good to see how VIG fares against those.

The nice thing here is that we also have long term data so it’ll be good to see how this did during the last recession.

The first full year of data is 2007 so that’s where the graph below starts.

VIG

The story here is solid. You can see solid growth across most years with a few dips here and there. The 2009 dip is especially impressive given that VYM dropped like a brick during that time.

I will note that the data here might not be 100% reliable as I source these from a variety of sources and one of the many sources showed a missed payment during 2009 which would bring the growth rate down. However, every other source had all 4 quarterly payments. Unfortunately Vanguard, for whatever reason, doesn’t supply data that far back which is annoying.

From a growth rate perspective, you can see how that 2009 reduction compares to something like VYM which dropped nearly 20% along the same line as SPY, the S&P 500 ETF.

VIG Growth

You can see that a -4.6% drop is pretty impressive followed by solid growth in the years ahead. That’s pretty huge given the reductions other ETFs saw in that same time frame and likely one of the reasons this ETF is so well liked.

What makes that 4.6% drop possible? One reason is that it’s possible that the monthly reconstitution allows it to quickly react to companies that did cut dividends so that they don’t weigh down the overall performance for the year. Another reason is the 10 year dividend growth requirement which means that companies in the index as of 2009 already went through another recession in 2000 which could help.

We did see a small reduction in 2013 which is a bit odd but likely a factor of some higher yield names being removed for some reason. There weren’t any specific events I could point that made that year stand out and most other dividend ETFs did well during that period.

While post-recession growth was great, the growth after 2016 has really slowed although it did tick up in 2021.

We did see growth in 2020 which is in line with all the other dividend ETFs we’ve reviewed but a positive given that an S&P 500 ETF like VOO saw a 4.8% drop.

The overall growth rate for VIG since it started has been 8.3%. That compares favorably to VYM’s 6.1% in that same time frame and SPY’s 5.5%. Those are the only two ETFs that go that far back.

If we look forward to growth since 2015, where we have more comparable ETFs, the growth rate slows to 6.5%. That’s not very good for a growth focused ETF. If we look at the ones we’ve reviewed so far, VIG rests near the back of the pack.

It’s not a very impressive growth rate for something that is supposedly focused on growth.

Still the fact that we saw such a small reduction in 2009 is a big boost to this ETF. Growth is important but consistency is just as important and the ability of this ETF to not fall a ton during the 2008 recession is pretty impressive.

It’ll be interesting to see how this impacts performance especially during that same recession so let’s take a look at that.

Performance

Due to VIG’s longevity, let’s take a look at how this sucker compares to the ETFs that run that far back.

To keep it simple, the data here starts in January 2007 and ends in August 2022 and shows $10,000 invested at the beginning with dividends re-invested.

VIG is right in line with the S&P 500 and about 1% better than VYM. VIG also has the lowest loss in its worst year which is always nice to see.

On top of that, the max drawdown while still large and happening during the 2008 recession is far better than both VYM and the S&P 500. That’s a rare event as most of these dividend ETFs have had max drawdowns that have been in line with the S&P 500.

Maybe one of the reasons it did much better is that consistency in dividends because VYM certainly didn’t fare as well.

You can see that annual performance here.

The performance in 2008 looks so much better than the others. It’s weird to say that a near 27% loss is so much better but during a recession you take what you can get.

What’s interesting is that so far in 2021, VIG hasn’t fared as well as some of it’s brethren. As of 9/28/22, while its 19.5% reduction from its 52 week high is better than the S&P 500s 22.8% reduction, VYM has done better with a 15.5% reduction from the 52 week high.

Both DGRO and SCHD had done better as well with a 18.8% and 17.2% reduction respectively.

Speaking of those other ETFs, let’s see how VIG performed against those. The data here will represent the same $10,000 invested with dividends re-invested and run from July 2014 to August 2022 because DGRO didn’t exist prior to that.

Here VIG has performed relatively well even if it trails SCHD and DGRO in CAGR. While its worst year is worse than the other two(and all have gotten even worse since the data doesn’t include September), the max drawdown is similarly better.

While the performance is over 1% worse than SCHD, it’s still within a reasonable distance and the improved max drawdown shows a slightly better safety profile than the other ETFs. While many often think that dividend ETFs do better than other equity types during turbulent times, the max drawdowns so far haven’t proven that to be true(although the worst years have been better in general).

It’s nice to see an ETF now that does have better performance across the board when it comes to that max drawdown. However, it’s not like these numbers are all that good because a 40% reduction during the 2008 recession is still pretty bad and speaks to the overall risk with equities.

Now that we’ve got a period of rising rates and better bond yields, stocks are getting hit and yield on these dividend ETFs starts to look a bit less attractive in relation to other options.

It’ll be interesting to see how the market progresses and whether VIG can keep its level of outperformance in bad times if the bear market stretches further than today.

On the income side, one of the benefits on a dividend ETF like VIG over a bond is that the income will continue to grow as seen below.

VIG

You may be able to get decent bond rates today but those bond rates will be locked for the term of the bond. VIG and other dividend ETFs might start lower today but will keep growing through the years and improving the yield on cost and that can be especially more pronounced if inflation remains elevated.

Someone who bought VIG in 2015 would have paid around $80 or a sub 2% yield at the time. Based on the last twelve months of payout, that yield on cost would be 3.6%.

For a growth ETF, that’s not an overly impressive difference as investors would have done better on a yield on cost basis with SCHD or DGRO as shown in the graph above. The impact is most clear with SCHD as that graph starts just a bit above VIG in 2015 but is almost double by 2021. That’ll happen when your growth rate lags and that lower growth rate compounded across multiple years can make a big difference.

 

VIG Overview, Valuation and Scorecard

VIG is the biggest dividend ETF out there and one with a lot of history.

Just like VYM, it’s a combination of the Vanguard name, a low expense ratio and a good track record and longevity.

This is not a high yielding name, yielding just 2.06% as of 9/28/22 so the name of the game should be growth.

However, while its 8.3% growth rate since inception is better than VYM and the S&P during that period, its growth rate in recent years is very lacking. The 6.5% growth rate since 2015 is barely above VYM’s 6.3% growth rate in that same time frame and much lower than more growth focused ETFs like DGRO or even SCHD. Rather disappointing for this type of ETF.

However, the fact that those dividends didn’t see a huge cut in 2009 is a big boon for someone who’s looking for a bit more safety in their dividends although the future is a bit more murky especially since we’re more than 10 years away from a recession and dividend cuts haven’t been too common since then which may reduce the chances that this one does as well as it did back in 2008 which was less than 10 years away from another recession.

On the performance side, the long term track record is similar to the S&P 500 with a smaller max drawdown and better performance during the last recession. In more recent times, performance has lagged other dividend ETFs like DGRO or SCHD but the difference wasn’t massive and one good year could change that.

From a valuation perspective, VIG has been hit just like all other names this year. It currently sits 19.47% below its 52 week high and has dropped a bit more than the comparable ETFs we’ve reviewed already. You can always see the most up to date information in this google spreadsheet.

That puts it at a P/E of 18.92 which is higher than the 18.79 of the S&P 500 and a good deal higher than the 13.7 you get from SCHD today. That’s not overly enticing but this is an ETF that has more growth names(in earnings not dividends) than some of the other ones.

It’s yield of 2.06% isn’t impressive and unless growth picks up, will continue to lag some of the higher growing names like DGRO and SCHD. However, this isn’t an ETF that goes well above this number and the average yield in the last 5 years has been 1.77%.

However, if you look at it further back, this is a fund that has done well in recent years in terms of price which has driven the yield down and there have been opportunities before then to get it at a higher yield.

Now that alternative yields are rising, maybe this is one that corrects a bit and allows investors to pick it up at a more reasonable valuation.

Overall, VIG is a pretty decent ETF but it does seem to lack in growth which is its namesake. It’s hard to be super happy about a dividend appreciation ETF that fails to appreciate well in terms of dividend payouts. The performance, however, has been solid and that’s especially true when it comes to the performance during the last recession.

There’s certainly a track record here that shows why this ETF has been so enticing to investors who want a bit more safety. Safety is relative as it still dropped over 40% during the last recession but saw less in dividend cuts than other ETFs.

Still, given its lack of growth and slightly under average performance, I can’t help but knock it on the completely made up scorecard.

The cost structure and longevity are fantastic but dividend yield and especially growth are nothing to write home about. Today’s valuation is a bit richer than some of the other ETFs we’ve looked at even after the bigger drop than some of the other ETFs this year.

Performance gets a bit of a boost due to how it did during the 2008 recession as overall performance since then has lagged ETFs like SCHD or DGRO. It’ll be interesting to see how VIG does if there’s another recession ahead of us as its done slightly worse in this most recent bear market.

However, if it can continue avoiding those dividend cuts like it did during the 2008 recession, that might be enough to keep it above the pack when compared to other ETFs.

For me, the valuation isn’t overly enticing right now and while I own VIG, I bought my shares way way back and haven’t really added since as other ETFs seemed more enticing. The data proves out that was the right move as performance has been a bit of a laggard and dividend growth has lagged for a growth based ETF.

Still, this is one I would likely start buying as yield keeps rising due its longevity and good history during a recession but it would take a 2.5%+ yield for me to get interested in it again and maybe even higher if bond yields keep rising. We’ll see if that ever happens as this one rarely hits that level and maybe there’s a reason for it.

Thanks for reading and as always let me know your thoughts and if you’d want me to review some specific dividend ETFs in this format. As this is a new series, I’m definitely looking for more feedback.

Disclosure : I am long VIG, SCHD, DGRO, VYM and maybe be long other stocks discussed in this article. This is not investment advice and I am not a financial advisor. Please talk to a professional before investing as any investments come with risk of loss, sometimes permanent. This blog is for entertainment purposes only. Returns represent past performance and are not a guarantee of future performance.

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