Vanguard closes dividend fund to new investors

Vanguard closed to new shareholders one of its most popular dividend mutual funds Thursday, saying it topped out at $30 billion as yield-hungry investors sought to earn income on their portfolios.

Current investors in the Vanguard Dividend Growth Fund can still put money in, but new investors are out of luck.

It's yet another sign that dividend-paying stocks have become the new bonds. Currently, 300 of the S&P 500 index companies yield more than the 10-year Treasury note, a phenomenon that has not occurred since 2009, according to data from asset-management firm Nuveen.

Investors have poured billions of dollars into dividend funds such as Vanguard Dividend Growth, run by portfolio manager Donald Kilbride, who works at sub-adviser Wellington Management.

Kilbride just completed 10 years of running the Vanguard Dividend Growth Fund, which beat 97 percent of rivals over that stretch, according to Bloomberg, and he did it by looking for companies with potential to increase their dividends.

"The reason to buy Dividend Growth is Kilbride," said Daniel Wiener, editor of Independent Adviser for Vanguard Investors.

That said, "it's always a good policy to slow down cash flows if they're overwhelming the manager. Vanguard will often do this when the manager asks for it," said Wiener, who bought the fund in 2007 and has about $300 million invested.

Kilbride has said he cares less about current yield than the prospect for future dividend increases.

"When I talk to investors, I try to get the conversation away from current yield. I'm thinking about a stock's future yield over the next five years," Kilbride told Bloomberg in a 2010 interview.

The Vanguard Dividend Growth Fund has a 1.90 percent yield and a 0.33 percent expense ratio.

When Wiener invested, the fund had just $1.37 billion in assets. Over the last six months, the fund drew an additional $3 billion in cash inflows, and, over the last three years, assets nearly doubled to $30 billion.

Kilbride runs a concentrated portfolio, what Wiener called "battleship balance sheet companies."

"But I would guess some [investors] misconstrued his strategy, thinking they get a high yield," Wiener noted, saying Kilbride was "really aiming for higher stock prices supported by regularly growing the dividend."

Top holdings of the fund include Microsoft, UPS, Costco, Nike, TJX Cos., Colgate-Palmolive, Accenture, Chubb, Marsh & McLennan, and Honeywell.

On Thursday, Vanguard suggested that investors put their money into the Vanguard Dividend Appreciation Index Fund (VDAIX), with net assets of $26.2 billion.

There is also an exchange-traded-fund version of VDAIX. It is passively managed and seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time.

"Vanguard will continue to monitor the cash flow of the Dividend Growth Fund and will take additional steps to limit the size of the fund if needed. Similarly, should conditions change, Vanguard may reopen the fund," the firm said in a statement.

earvedlund@phillynews.com

215-854-2808 @erinarvedlund