VIG - VIG: Better Downside Protection To The S&P 500

2023-06-21 04:00:02 ET

Summary

• Vanguard Dividend Appreciation Index Fund ETF invests in large-cap dividend growth stocks that have increased their dividends for at least 10 consecutive years, offering better downside protection.
• VIG has higher exposure to defensive sectors than the S&P 500 index, making it more resilient during economic downturns.
• Although VIG's total return is slightly inferior to the S&P 500 index in the long run, its portfolio of high-quality dividend growth stocks makes it a good long-term core holding for investors.

Introduction

Some investors prefer investing in dividend growth funds as they provide dividend growth and offer better downside protection. In this article, we will analyze Vanguard Dividend Appreciation Index Fund ETF ( VIG ) and provide our analysis to see whether VIG is a good investment choice or not.

ETF Overview

VIG invests in large-cap dividend growth stocks that have increased their dividends for at least 10 consecutive years. The fund tracks the NASDAQ U.S. Dividend Achievers Select Index. The fund has a portfolio of stocks that have increased their dividends for more than 10 consecutive years. The fund has higher exposure to defensive sectors than the S&P 500 index and thus has better downside risk protection. Although its long-term total return was slightly inferior to the S&P 500 index, given its portfolio quality, we think it is still a good investment choice especially for investors with a long-term investment horizon.

Fund Analysis

Why 10+ years of dividend growth matters

We like VIG’s investment strategy as it only includes stocks that can grow their dividends for 10 or more consecutive years. In addition, it screens out stocks that might not be able to sustain their dividend growth in the future by examining their future profitability. The result is a portfolio of high quality dividend growth stocks that have grown their dividends for 10+ consecutive years. As the chart below shows, its top-10 holdings have increased their dividends consecutively in the past 10 years. In fact, some have even increased their dividends consecutively for more than several decades. For example, Procter & Gamble ( PG ) has increased their dividends for more than 67 consecutive years.

This selection is important because companies that were able to grow their dividends in the past and have the ability to increase their dividends in the future are usually companies that have a good runway of growth in their businesses. In addition, these companies have been through different cycles of the economy numerous times and are still able to generate solid cash flows to pay shareholders and increase their dividends. Hence, these stocks should continue to reward investors with both earnings growth and dividend growth over the long run.

Higher exposure to defensive sectors than the S&P 500 index

VIG has higher exposure to defensive sectors than the S&P 500 index. As can be seen from the table below, health care, consumer staples, and utilities represent 16%, 12.1%, and 3.2% of VIG’s total portfolio. Together, they represent 31.3% of VIG’s total portfolio. This exposure is higher than the S&P 500’s 23.3%.

This higher exposure is favorable as VIG’s price should be more resilient during economic rough times. Although we cannot predict how this fund will perform in future recessions, past results can often give us some clue of how it will likely perform in the future. As can be seen from the chart below, VIG has “outperformed” the S&P 500 in the past two recessions. In the Great Recession in 2008/2009 and the 2020 recession caused by the pandemic, the fund has dropped as much as 48%, and 18% respectively. In contrast, the S&P 500 index lost about 55% and 23% respectively. Therefore, VIG appears to have less downside risk than the S&P 500 index in bear markets.

Slightly inferior total return than the S&P 500 index in the long run.

Let us now evaluate VIG's total return. VIG’s total return of 71.1% in the past 5 years was impressive but slightly inferior to the S&P 500’s 73.1%. Over the long run, VIG has delivered a total return of 355.2% since its inception in April 2006. This return was solid but lower than the S&P 500’s 377.6%. Other funds such as WisdomTree U.S. LargeCap Dividend ETF ( DLN ) only delivered a total return of 254.4%, much inferior to VIG and the S&P 500 index.

Investor Takeaway

Although VIG has lower total returns in the long run than the S&P 500 index, the difference is not huge. VIG also has a portfolio of high quality dividend growth stocks that have sailed through rough times and is poised to continue to grow their dividends in the future. Investors owning VIG should have a peace of mind even in a bear market. Therefore, we think this is a good long-term core holdings.

Additional Disclosure : This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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