Five-Star Fund for Growth and Income

09/30/2013 9:00 am EST

Focus: FUNDS

Genia Turanova

Editor, Leeb Income Performance

The relative value of stocks that provide both income and growth looks increasingly attractive. Growing companies can produce growing dividends, and thus satisfy the need for both income and growth, notes Genia Turanova of Leeb Income Performance.

We view Vanguard Dividend Growth Fund (US:VDIGX) as one of the best among total-return oriented mutual funds.

As the need for investment income remains strong, the overall value to investors of stock dividends will likely continue growing in the years ahead. Morningstar rates it both five-star and gold, an indication of the fund's strong past and promising future.

The fund's stated yield of 1.9% isn't tops among equity funds, as income isn't its primary objective. By design, the fund strives to provide investors with some income while also offering exposure to dividend-focused companies across all industries.

To fulfill its goal, the Vanguard fund owns, for the most part, large, blue-chip companies that have both the ability and the commitment to raise their dividends over time.

Out of its 50-stock portfolio, the top ten positions (together accounting for about 28% of total assets) are all large global companies, such as Johnson & Johnson, UPS, Roche Holdings AG, Target, PepsiCo, IBM, Exxon Mobil, Procter & Gamble, Medtronic, and Automatic Data Processing.

Thus, the fund's average market cap tends to be at the higher end of the category, with the portfolio invested almost exclusively in the shares of mega-cap (55%) or large-cap (44%) companies.

The fund, despite its seemingly low-yield and relatively concentrated portfolio, has a relatively conservative investment style; it earns a Morningstar risk rating for all time periods of low.

Moreover, the upside/downside capture also indicates that the fund is safer than the average in its Large Blend category. The fund also features another positive, a rock-bottom expense ratio of 0.29%. Well-managed and inexpensive, Vanguard Dividend Growth remains a buy here.

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