Good news: You’re 60 and ready to retire within five years. Bad news: Your retirement investing isn’t going to be easy.
That’s because you’re likely to live another 20 years (assuming reasonable health at 65) after retirement, which means you don’t want your money to run out before you ride off into the sunset. As a result, you might want a portfolio that combines steady income with capital appreciation.
Thankfully, there are several Vanguard dividend funds that can help you achieve this objective.
So, what’s your dividend stock retirement strategy? If you don’t have one, you probably should. Investing in dividend stocks provides both income and capital appreciation and is a good way to ensure your money outlasts you.
But don’t worry if you haven’t come up with a brilliant plan — I’ve prepared a list of three possible Vanguard dividend funds to buy for retirement. All can become the cornerstone of any dividend stock retirement strategy.
Vanguard Dividend Funds – Vanguard Dividend Growth Fund (VDIGX)
Click to Enlarge VDIGX Dividend Yield: 1.9%
Of the three Vanguard dividend funds, Vanguard Dividend Growth Fund (VDIGX) is the only actively managed portfolio available.
The $21 billion fund invests in just 50 stocks of the highest quality, providing dividend growth over time (hence the name). A $10,000 investment in 2004 is worth approximately $25,000 today. Over the past decade, VDIGX has outperformed its benchmark by 192 basis points annually — not bad for a fund whose expense ratio is 0.31%, or 71% lower than funds with similar holdings.
Wellington Management is the adviser for VDIGX and has been since its inception in 1992. Donald Kilbride has managed VDIGX for the past eight years, and he’s done a good diversifying by sector despite the limited number of dividend stocks in the portfolio. A total of seven sectors have at least a 10% weighting with the top 10 holdings — including UPS (UPS), McDonald’s (MCD) and Lockheed Martin (LMT) — accounting for just 27% of the entire fund.
Kilbride is permitted to invest as much as 25% of the fund in international dividend stocks, but has kept it around half that amount.
Of the three Vanguard dividend funds, Morningstar gives VDIGX the only gold rating of the bunch, making it a “strong conviction” buy.
Vanguard Dividend Funds – Vanguard Dividend Appreciation Index Fund (VDAIX)
Click to Enlarge VDAIX Dividend Yield: 1.9%
To be included in this index, a dividend stock must trade on either the NYSE or Nasdaq and have increased its annual regular dividend for the past 10 or more consecutive years. The index is reconstituted annually at the end of January, and 87% of the constituents are large-cap dividend stocks with market caps greater than $10 billion.
Since 2000, VDAIX has delivered positive annual returns in 11 of 14 years and racked up $24 billion in total net assets, reminding us about the wisdom of passive investing. A $10,000 investment in 2006 is worth approximately $18,000 today.
Since its inception, it has underperformed the S&P 500 by approximately 10% on a cumulative basis, which explains why Morningstar only gives it a three-star rating. However, the index’s ability to generate positive returns most years along with smaller losses in down years — VDAIX down 27% in 2008 compared to 38% for the S&P 500 — makes it the safest of the Vanguard dividend funds.
Vanguard Dividend Funds – Vanguard High Dividend Yield Index Fund (VHDYX)
Click to Enlarge VHDYX Dividend Yield: 2.9%
The second of the two indexed Vanguard dividend funds, Vanguard High Dividend Yield Index Fund (VHDYX) has an SEC yield almost a full percentage point higher than its two stablemates at 2.89%. In today’s low-interest-rate environment, that’s huge. It’s for this reason that Morningstar rates it five stars.
Over the past five years, VHDYX has delivered a total annual return of 19.5%, 218 basis points higher than its category peers. Its high dividend yield focus enables it to deliver a slightly higher total return over those five years because of the 1% difference in yield. (Remember, total return is capital appreciation plus yield.)
The median market cap for the fund’s 392 dividend stocks is a whopping $136 billion — the index invests in only the biggest of U.S. companies. As a result, you really don’t even need an international fund in your portfolio because all of its top 10 holdings (and most of the remaining 382) operate their businesses globally. We’re talking behemoths like Apple (AAPL), Exxon Mobil (XOM) and Microsoft (MSFT).
Furthermore, VHDYX has the cheapest expense ratio — 0.19% — of the three Vanguard dividend funds. In addition, with representation from 10 different sectors, you gain the best diversification of the bunch.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.