Vanguard Equity Income Fund Investor Shares (VEIPX) and Vanguard Dividend Growth Fund Investor Shares (VDIGX) are two reliable Vanguard mutual funds that specialize in investing in predominantly domestic equities of companies that pay regular dividends.

While having somewhat similar investment objectives, these two funds differ on several fronts. First, each has different exposure to sectors, numbers of holdings, management styles, and investment selection processes. Second, Vanguard Equity Income Investor Shares tend to focus more on large-cap value stocks, while Vanguard Dividend Growth Investor Shares hold a basket of different types of large-cap stocks.

Investment Selection Process

Donald Kilbride—an industry veteran who has advised the fund since 2006 and has more than 20 years of investment management experience—manages Vanguard Dividend Growth Investor Shares. Kilbride prefers a concentrated portfolio of around 50 stocks of companies with strong competitive advantages. At the end of 2019, the fund held 47 names.

Key Takeaways

  • Dividend funds are mutual funds that focus on buying stocks with attractive dividend yields.
  • Vanguard Dividend Growth Fund Investor Shares and Vanguard Equity Income Fund Investor Shares are two dividend mutual funds that have similar objectives.
  • However, the two funds differ in many respects: the number of stocks held, asset allocations, and stock-picking methodologies.
  • Like many Vanguard mutual funds, Vanguard Dividend Growth Investor Shares and Vanguard Equity Income Investor Shares have been reliable, low-cost vehicles for longer-term investors.
  • Average annual returns over the past 10 years have been roughly 13%.

Vanguard Dividend Growth Investor Shares holds companies with consistent dividend growth and does not necessarily chase stocks that currently have above-average yields. In fact, the fund stays away from companies after dividend yields spike, which may signal upcoming dividend cuts. The result is a 30-day SEC yield of 1.85%, which is behind yields for funds with similar investment goals. Donald Kilbride may, at times, look for stocks that have respectable payout ratios, which can sustain dividend growth going forward.

Vanguard Equity Income Investor Shares, on the other hand, tends to focus on stocks of high-yielding companies with low valuations, but promising growth prospects. This has led Morningstar to classify the fund under the large value category for its distinct emphasis on holding undervalued equities. The fund typically holds a much larger number of stocks—in the realm of 150 to 200—with lower price-to-earnings (P/E) ratios. The total number of stocks in the portfolio at the end of 2019 was 199.

Michael Reckmeyer of Wellington Management Company LLP and James Stetler of Vanguard advise Vanguard Equity Income Investor Shares. Reckmeyer tends to use fundamental analysis to select stocks, while Stetler uses quantitative methods and picks stocks from the FTSA High Dividend Yield Index based on various characteristics, such as dividend yield, momentum, growth, and management quality. This has resulted in a 30-day SEC yield of 2.70%.

Sector Exposure

These funds also differ in their sector allocations based on their investment selection processes. The largest sector allocations in Vanguard Dividend Growth Investor shares are industrial stocks (20.1% allocation), health care stocks (17.8% allocation), and consumer staples stocks (16.3% allocation). The fund may also have an overall overweight position in health care stocks from time to time.

Vanguard Equity Income Investor Shares, on the other hand, tend to favor financials stocks (17.8% allocation), health care stocks (15.4% allocation), and consumer staples equities (13.4% allocation). The fund also holds almost 9% of its assets in energy equities since the fund managers deemed dividend yields of certain energy companies too compelling to pass on.

Investment Performance

When it comes to investment performance, Vanguard Dividend Growth Investor Shares has shown about the same or slightly lower returns at higher volatility when compared to Vanguard Equity Income Investor Shares. From Jan. 2010 to Jan. 2020, Vanguard Dividend Growth Investor Shares have shown an average annual return of 13.1%, a three-year standard deviation of 10.3%, resulting in a three-year Sharpe ratio of 1.31. For the same period, Vanguard Equity Income Investor Shares demonstrated an average annual return of 12.9%, a standard deviation of 10.77%, and a Sharpe ratio of .92.

Both funds were top performers in their respective investment categories. Vanguard Dividend Growth and Vanguard Equity Income Investor Shares earn overall five-star ratings as well as five-star ratings for the five-year and 10-year periods from Morningstar. For the three-year period, Vanguard Dividend Growth Investor Shares earn a five-star rating, while Vanguard Equity Income Investor Shares have a four-star rating.

$3,000

The minimum amount for initial investments into Vanguard Dividend Growth Investor Shares or Vanguard Equity Income Investor Shares mutual funds.

Vanguard Dividend Growth Investor Shares have also earned a gold analyst rating from Morningstar, while Vanguard Equity Income Investor Shares earn a silver analyst rating. Lastly, Vanguard Equity Income Fund Investor Shares come at a net expense ratio of 0.27%, which is slightly higher in comparison to the net expense ratio of the Vanguard Dividend Growth Investor Shares, at 0.22%.