The Vanguard Equity Income Fund Inv fund (VEIPX) and the Vanguard Dividend Growth Inv fund (VDIGX) are two of the best 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, these two funds have different exposures to sectors, numbers of holdings, management styles and investment selection processes. The Vanguard Equity Income Fund Inv fund tends to focus more on large-cap value stocks, while the Vanguard Dividend Growth Inv fund holds a blend of large-cap stocks.

Investment Selection Process

The Vanguard Dividend Growth Inv fund is managed by Donald Kilbride, an industry veteran who has advised the fund since 2006 and has 20 years of investment management experience. Kilbride prefers a concentrated portfolio of around 50 stocks of companies with strong competitive advantages. The fund focuses on consistent dividend growth and does not necessarily chase stocks that currently have above-average yields. In fact, the fund stays away from companies whose dividend yields spike and may signal upcoming dividend cuts. This resulted in a 30-day SEC yield of 2.01%, which is behind yields for funds with similar investment goals. Donald Kilbride may at times look for stocks that have payout ratios, which can sustain dividend growth going forward.

The Vanguard Equity Income Fund Inv fund, 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 of 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 fund is advised by Michael Reckmeyer of Wellington Management Company LLP and James Stetler of Vanguard. 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 3.02% for the Vanguard Equity Income Fund Inv fund.

Sector Exposure

These funds differ in their sector allocations based on their investment selection processes. The Vanguard Dividend Growth Inv fund's largest sector allocations are industrials stocks (18% allocation), health care stocks (about 17% allocation) and consumer staples stocks (17% allocation). The fund may also have an overall overweight position in health care stocks from time to time.

The Vanguard Equity Income Fund Inv fund tends to favor financials stocks (16% allocation), health care stocks (13% allocation) and consumer staples equities (12% allocation). More recently, the fund took a sizable position in energy stocks after their significant declines on oil price fears. The fund holds almost 10% 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 for the last three, five and 10 years, the Vanguard Dividend Growth Inv fund has shown about the same or slightly higher returns at a lower volatility when compared to the Vanguard Equity Income Fund Inv fund. From January 2006 to January 2016, the Vanguard Dividend Growth Inv fund has shown an average annual return of 8.35% and a standard deviation of 12.48%, resulting in a Sharpe ratio of 0.62. For the same period, the Vanguard Equity Income Fund Inv fund demonstrated an average annual return of 7.33% and a standard deviation of 13.93%, resulting in a Sharpe ratio of 0.50. Also, when looking at the three- and five-year performances, the Vanguard Dividend Growth Inv fund has consistently shown higher Sharpe ratios in comparison to the Vanguard Equity Income Fund Inv fund.

Both funds were top performers in their respective investment categories. The Vanguard Dividend Growth Fund and the Vanguard Equity Income Fund Investor Shares have earned five-star overall rating and five-star ratings for the five- and 10-year periods from Morningstar. For the three-year period, the Vanguard Dividend Growth Fund earned a five-star rating, while the Vanguard Equity Income Fund Investor Shares received a four-star rating. The Vanguard Dividend Growth Fund has also earned a gold analyst rating from Morningstar, while the Vanguard Equity Income Fund Investor Shares has earned a silver analyst rating from Morningstar.The Vanguard Dividend Growth Inv fund has also earned a gold analyst rating from Morningstar, while the Vanguard Dividend Growth Fund has earned a silver analyst rating from Morningstar.

Investment Terms

The Vanguard Equity Income Fund Investor Shares comes at a net expense ratio of 0.26%, which is slightly lower in comparison to the Vanguard Dividend Growth Inv fund's net expense ratio of 0.32%. Both funds have a minimum investment requirement of $3,000.