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Summary VDAIX offers investors a great start to building a dividend portfolio. The fund is missing almost all exposure to the utility sector and to oil and gas. The expense ratio on the investor class of shares is .2%, which is higher than I would want to see for a long term holding. If an investor builds a portfolio around this fund they should be adding their own utility and oil exposure. CVX and COP offer great dividend yields. A very well diversified equity portfolio would also use some equity REIT exposure from another ETF. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. Despite my frequent use of ETFs in my personal investing, many retirement accounts still use mutual funds as a major source of their investing. When it comes to assessing the mutual funds, one of my earlier favorites is the Vanguard Dividend Appreciation Index Fund (MUTF: VDAIX ). Largest Holdings I’m starting the analysis by looking at the largest holdings in VDAIX. As you can guess from the name there is a heavy emphasis on receiving dividends from the portfolio. (click to enlarge) Where is the Oil? Granted oil prices are plummeting and oil stocks may seem “risky”, but a small inclusion would be entirely appropriate for a portfolio focused on dividends. The yields are high and the companies would benefit from higher gas prices while many parts of the economy would be disadvantaged by high fuel prices. For diversification purposes it is very strange not to have them included. Big oil can pay some big yields. ConocoPhillips (NYSE: COP ) has a dividend yield around 5.75%. When the mutual fund is yielding slightly over 2% it seems like adding some COP to the portfolio would be an excellent choice. It provides more diversification to the portfolio and a much stronger yield. Phillips 66 (NYSE: PSX ) is only yielding 2.6%, but that would still benefit the yield across the entire fund. Chevron (NYSE: CVX ) has a yield around 5%. Those all seem like viable options to me. If the portfolio is really focused on taking dividend income I would think COP and CVX would be a natural fit for the top 10 holdings. Diversification Benefits The correlation to SPY is just under 97%, so diversification benefits are not very substantial. However, the volatility on the fund is materially lower at only 87% of the level on SPY which is nice for investors that would prefer more stability in their portfolio values. Expense Ratio The mutual fund is posting an expense ratio of .20%. I want diversification, I want stability, and I don’t want to pay for them. An expense ratio of .20% may seem pretty good to many investors but this falls below my level expectations for Vanguard. Since Charles Schwab (NYSE: SCHW ) cut their expense ratios on ETFs and ensured the two were locked in a price war it has been easier for me to find very low expense ratios. With that said, .20% certainly isn’t bad. It just isn’t up to the level I want to see on my investments since I’m looking at the expected returns on periods greater than 30 years and the compounding effects of a high expense ratio can severely reduce an investor’s total wealth over a time period measured in decades. Sector Allocations To go a little deeper into the absence of the major oil companies I like to see included in a dividend growth portfolio, I grabbed a chart of the sector allocations. (click to enlarge) If you were to combine oil and gas with the utility sector the combined weight would still only be 3.5%. In my opinion the combined weight should be at least 20% and I wouldn’t object to seeing it even higher. Conclusion This is a pretty good fund but these investor class shares of the mutual fund carry an expense ratio of .2% which is higher than I would like to see. The bigger issue for many investors may be that the portfolio does not fulfill the reasonable level of diversification for the equity portion of a portfolio. If an investor wants to tie up a significant portion of their 401k account in VDAIX they would be wise to also hold funds that provide them with a material exposure to both utilities and oil and gas. For the sake of diversification, especially in a tax advantaged account, I would suggest including some equity REIT exposure to give the portfolio a more thoroughly diversified set of exposures while increasing the dividend yield since most equity REITs and utilities offer higher yields. Of course, using some CVX or COP is another solid way to boost yields even further. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. Scalper1 News
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