VIG - VIG: No Performance Enhancement

2023-11-19 01:10:15 ET

Summary

• The fund dividend growth strategy does not outperform the S&P 500 or peers.
• VIG excludes REITs and the top 25% highest dividend stocks.
• Consensus estimates suggest a 9% total return potential for VIG.

Summary

The primary objective of the fund is not to provide a high dividend yield. Instead, it focuses on capital gains and selectively invests in consistent dividend growth. The fund's strategy is based on the belief that such companies are likely to provide steady growth, which translates into lower risk and high returns over time. However, the Vanguard Dividend Appreciation Index Fund ETF ( VIG ) has not outperformed the S&P 500 nor many of its peers.

VIG tracks to the S&P US Dividend Growth Index

The fund's investment strategy is to track the S&P Dividend Growth Index . This index excluded REITs and the top 25% highest yields stocks and limits holding to a 4% weight.

Portfolio upside potential

Based on the consensus price targets for 80% of the funds AUM, which involves 67 stocks, I have calculated that VIG has a potential upside of 8% by YE24. Although this might not seem like an exciting capital appreciation potential, it is similar to the long-term returns of the S&P 500. The table below shows that the stock selection has less tech and lower concentration, which may provide reduced volatility.

Dividend growth

The namesake and strategy of the fund is to focus on stocks with dividend growth. According to the consensus estimates, the fund is expected to experience a 6% growth rate in DPS during the YE24-25 period. This moderate growth rate is due to the fact that the fund invests in slower-growing, more mature companies that require less capital expenditures. As shown in the table, the portfolio may generate a 2% dividend yield. However, for those looking for higher income, this fund may not be the best option.

EPS growth

As may be imagined for the strategy, EPS growth is in line with DPS growth as companies pass on earnings growth to dividends in lieu of internal investment needs. With the exception of a few stocks, the EPS growth rate is relatively consistent through the forecast time frame. The fund stability goal seems to be met under current consensus forecasts.

Valuation

In order to assess the portfolios valuation relative to EPS growth, we need to consider the PEG ratio. This is derived by comparing the consensus YE24-25 EPS growth with YE24 PE. The rule of thumb is that a ratio of 1x or less is considered cheap or undervalued. In the case of this portfolio, the PEG ratio is 1.8x with a YE24 PE of 17x. This means that the portfolio is not undervalued, but it's not wildly expensive either. It's important to note that the PEG ratio has been adjusted for negative ratios and a few over 20x results that are influenced by a stock's weak EPS growth.

Conclusion

I rate VIG a hold. This fund should continue to perform in line with the SP500 and perhaps offer less day-to-day volatility given the more equal holding weights and reduced tech exposure. I would not recommend this fund for dividend investors.

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