Tuesday, November 7, 2017

Vanguard Dividend Appreciation Index (VDAIX, VDADX, VIG, VGH, VGG)

As I have mentioned before I tend to typically invest in low-cost index funds. I do own some stocks, but they are a very small portion of my overall portfolio. With index funds my portfolio is instantly diversified, even without investing a major chunk of money. Secondly, the passive management essentially saves me from star performers (i.e. money managers who out perform the market in a year and then trail it for the next 5). Stocks are inherently risky, I do not want to add to it by picking any specific stock. My objective is to own a basket of stocks based on a specific theme.


Vanguard is synonymous with low cost index investing. In fact Vanguard created the very first index fund (S&P 500) in 1976. Now, I would like to introduce to the dividend community to Vanguard Dividend Appreciation Index fund (VDAIF). I own VDAIF in my portfolio. It constitutes about 10% of my investments. VDAIF gives me access to owning quality dividend paying stocks (diversified dividends) and a hands off approach to investing.

This fund invests in domestic stocks which have a history of increasing dividends. Being an index fund, VDAIF seeks to replicate the performance of NASDAQ US Dividend Achievers Select Index. The stocks in this index have at least 10 years of annual dividend increase.

VDAIF has 181 stocks in it. These 181 stocks have increased their yearly dividends for at least 10 years. Stocks which have the ability to increase their dividends for extended duration of time tend to have a strong balance sheet. The top 10 stocks constitute about 31% of the overall portfolio. Microsoft (MSFT) is the largest single holding at 4.41%.





VDAIF is well diversified across all sectors. It is concentrated in the industrial sector (33%). A large chunk of the dividend growers/achievers tend to be in the industrial sector. Note: zero exposure to energy sector.

VDAIF predominantly holds large-cap stocks. In spite of being a dividend funds, it does not hold a major chunk of value stocks. In fact it is classified as a blend fund (has both growth and value characteristics). In my opinion VDAIF is a quality stock fund. However, it does have some exposure to mid and small capitalization stocks.



Before I mention dividends, I wanted to talk about expenses. VDAIF is available in 3 categories. As an ETF , investor mutual fund and finally a low cost admiral mutual fund.

Vanguard Dividend Appreciation Index Fund Investor Shares (VDAIX)
Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)
Vanguard Dividend Appreciation ETF (VIG)


VIG is traded like a stock. It can be bought and sold using any brokerage (with a commission). If you have a vanguard brokerage account, VIG trades with zero commission. VIG has a very low expense ratio of 0.08%. It is however not possible to buy fractional VIG ETFs. However, it is possible to DRIP fractional shares. There is no minimum investment needed, all you need is $97.06 to buy one share of VIG. Since fractional shares are not allowed, it is not possible to setup an auto-investment plan.

VDADX is the mutual fund version of VIG ETF. It has the same expense ratio (0.08%).However, it has a minimum investment of 10,000$. It is possible to buy fractional units and setup an auto-investment plan (daily/weekly/monthly). VDAIX is an investor mutual fund. It has a much lower minimum of $3,000 and a higher expense ratio of 0.17%.


The reason I mentioned expense ratio before dividends is because the expense ratio is directly deducted from the dividend yield. So, there will some difference in yields between the three varieties. VIG has a dividend yield of 1.90%. It payed a dividend of $0.43 on 09/25/2017. All the above variants pay their dividends quarterly.

For Canadians interested in investing in this awesome fund, there are two ETFs (one with currency hedging and another without currency hedging) available. Unfortunately the mutual fund variant is not available.
U.S. Dividend Appreciation Index ETF (CAD-hedged) (VGH)
U.S. Dividend Appreciation Index ETF (VGG)


Tax implications:
Dividends are treated as Qualified dividends and are taxed at long term capital gains rates — which are lower than ordinary income tax rates. Probably a good idea to have it in a tax advantaged account.

Something I forgot to mention is the pitfall of diversification. Whereas owning a single share of VIG gives you instant access to 200 stocks, you lost the ability to pick and chose which stocks to own. Still the understanding is that this bucket of stocks would still perform well.








4 comments:

  1. Hi Geek, I think your strategy is very sound. My favorite Vanguard ETF is the Vanguard High Yield Dividend ETF (VYM). VDAIF is another great one as you discuss. Tom

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  2. Awesome Geek. Before I created my portfolio, I was struggling with the decision about the makeup of my portfolio. Should I go with individual stocks or index funds. For the longest while, I gravitated towards index funds and ETFs, but finally settled on individual stocks. And I'm glad I did. It's probably a ridiculous reason, but I chose individual stocks because I thought it would be more fun to keep track of, which of course meant that I would keep up with the portfolio.

    That being said, I definitely see the value of index funds. In fact, my retirement account is made up of only one fund, which is the VTSMX, which is the Vanguard Total Market Stock Index Fund. I was also thinking about VYM and VIG, and I may still add them to my portfolio, but it seemed redundant. But, for the reasons you mentioned, in terms of diversification, low fees, etc, I chose the safer option for my retirement account.

    Thanks for giving me another fund to consider.

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    Replies
    1. Hello DP,
      There is something for everyone with these ETFs. Even if you want to invest on your own, VIG still gives us a list of stocks with 10+ years of dividend increases. We could work of that list to find value. There is definitely overlap between VTI VYM and VIG.

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