VIG: No Performance Enhancement (NYSEARCA:VIG) -LSB

Briefing

The main objective of the fund is not to provide a high dividend yield. Instead, it focuses on capital gains and selectively invests in sustainable dividend growth. The fund’s strategy is based on the belief that such companies are possible to ensure sustainable growth, which translates into lower risk and higher returns over time. However, the Vanguard Dividend Appreciation Index ETF Fund (NEW YORK:litter) has not outperformed the S&P 500 and neither have many of its peers.

VIG tracks the S&P US Dividend Growth Index

The fund’s investment strategy is to track S&P Dividend Growth Index. This index excluded REITs and stocks with the highest yields of 25% and caps holding the weight of 4%.

Portfolio upside potential

Based on consensus price targets for 80% of the funds AUM, which includes 67 stocks, I calculate that VIG has a potential upside of 8% through YE24. While this may not seem like exciting equity appreciation potential, it is similar to the long-term returns of the S&P 500. The table below shows that the stock selection has less technology and lower concentration, which can provide reduced volatility.

Dividend increase

The fund’s namesake and strategy is to focus on dividend growth stocks. According to consensus estimates, the fund is expected to experience a 6% growth rate in DPS during YE24-25. This moderate growth rate is due to the fact that the fund invests in slower growing and more mature companies that require less capital expenditure. As shown in the table, the portfolio can generate a dividend yield of 2%. However, for those looking for higher income, this fund may not be the best option.

EPS growth

As can be imagined for the strategy, EPS growth is in line with DPS growth as companies pass earnings growth into dividends rather than internal investment needs. With the exception of a few stocks, the EPS growth rate is relatively stable over the forecast time frame. The fund’s stability objective appears to have been met according to current consensus forecasts.

ASSESSMENT

To assess portfolio valuation in relation to EPS growth, we need to consider the PEG ratio. This is derived by comparing YE24-25 EPS consensus growth to YE24 PE. The general rule of thumb is that a ratio of 1x or less is considered cheap or undervalued. In the case of this portfolio, the PEG ratio is 1.8x with a YE24 PE of 17x. This means that the wallet is not underrated, but it is not too expensive either. It is important to note that the PEG ratio is adjusted for negative ratios and some results above 20x that are affected by a stock’s weak EPS growth.

CONCLUSION

I rate VIG a wait. This fund should continue to perform in line with the SP500 and perhaps offer less daily volatility given the more equal holding weight and reduced technology exposure. I would not recommend this fund to dividend investors.