Dividend-focused strategies have long been an investor’s staple as these investments provide steady and reliable income streams. But for those looking for a “safer”, more targeted approach to dividends, the Vanguard Dividend Appreciation Index Fund (VDAIX) offers a compelling and low-cost option.
Inside the Vanguard Dividend Appreciation Index Fund
The Vanguard Dividend Appreciation Index Fund (VDAIX) is a passively-managed fund that focuses exclusively on high-quality U.S. companies that have a history of increasing dividends and exhibit the ability and commitment to grow their dividends over time. Its underlying benchmark, the NASDAQ US Dividend Achievers Select, screens the investment universe for securities with at least 10 consecutive years of increasing annual regular dividend payments.
The investment thesis behind VDAIX is quite simple: companies with solid track records of increasing dividends are typically larger and more stable companies that have the means to continuously return and grow shareholder value via dividends. It is important to note, however, that the yields offered by these companies may not seem that attractive – but remember that a stock with a high yield may in fact be a dividend value trap instead of a sound investment.
Under the Hood
VDAIX’s portfolio consists of just over 180 individual securities featuring a median market cap of $59.2 billion. In terms of sector allocations, the fund is tilted toward industrials, consumer goods, and consumer services, each of which receive an allocation of roughly 20% of total assets. Technology, health care, financials, and basic materials equities are also given meaningful allocations.
As of 6/1/2015, VDAIX’s top holdings included:
- Microsoft (MSFT) – 4.5%
- International Business Machines (IBM) – 4.0%
- Johnson & Johnson (JNJ) – 3.9%
- Coca-Cola (KO) – 3.8%
- Procter & Gamble (PG) – 3.8%
How to Use VDAIX
VDAIX can be used as a core holding in any traditional long-term portfolio. Investors with conservative risk tolerances may find this fund more appealing than other dividend-focused strategies as the companies included in VDAIX are known for their steady, reliable, and growing distributions.
Another great feature of VDAIX is that it only charges an expense ratio of 0.20% with a minimum investment of $3,000. The Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX) is another option – it charges 0.10% with a minimum investment of $10,000.
Before making any investment decisions, be sure to take a close look under the hood of each prospective investment to make sure the fund is appropriate for your unique risk/return profile.
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Disclosure: No positions at time of writing.