The Vanguard Equity Income Fund: A Delightful Lifelong Holding

Reader “Matt” from this site recently pointed out one of his favorite investments to me: The Vanguard Equity Income Fund, which has an expense ratio at 0.30% and has the stated purpose of owning common stocks that either offer a starting dividend yield above the S&P 500 average or possesses a dividend growth rate over the S&P 500 average.

The Fund consists of 159 stocks that have the following blended characteristics: A P/E ratio of 16.7, a return on equity figure of 19.8%, a collection of companies that are growing profits at 11.3%, and a turnover rate of 34% (that’s a little bit on the high side for me—I prefer finding those rare funds with turnover rates at 10% or below, but compared to what is out there, this turnover rate is quite good when compared against its peers in the industry that actually have turnover rates above 100% as a full set of stocks get flushed out of the portfolio of every twelve months).

Even though it has 159 stocks, the top ten holdings account for over 30% of the fund’s total holdings. And I have to admit, I’m impressed by the Vanguard Equity Income’s handiwork on this one.

Johnson & Johnson is the largest holding, coming in at 4.0% of the portfolio. Yes, yes, yes. Along with Exxon, Colgate, Coca-Cola, PepsiCo, Procter & Gamble, and Nestle, when you hear that a fund manager has selected Johnson & Johnson as their largest holding, you know that you have found a good, conservatively managed place to be. If you are screening for 401(k) mutual fund investments and you see one of those stocks listed in the top holdings, you should find peace and serenity with the watchmen who are entrusted to be the guardians of your wealth.

In the number two and six spot are Wells Fargo and JPMorgan, respectively. They’ve owned Wells Fargo for a bit, so they’ve been able to benefit shareholders with significant capital appreciation while the dividend has come back to life. I don’t have a quick internet connection right now and I’m going off of memory, but if you look at the figures for Wells Fargo and JPMorgan the past few years, it resembles something like 20% dividend pops here, 15% dividend pops there. Both of their dividend payout ratios are in the 30-40% range. Over the super long term, they will probably hit 50%. In other words, these banks are midway through their stride in jacking up their dividends, and my guess is that you’ll be giving the Vanguard Equity Income fund a thumbs up five years from now for the dividend payouts from these two banks if you’re a holder right now.

They also have Exxon and Chevron in their top ten, which again, pounds the table in favor of quality. Chevron and Exxon are so diversified they almost function as energy index funds in their own right, and there is absolutely no other way to participate in cyclical investing with more safety. If you read the way that Exxon is regarded in some third-world countries (read the book Private Empire), you will reach the conclusion that Exxon is more powerful, or at least equally powerful, to some governments in the world. In above average years, make $35 billion in profits across 48 countries. That is, they make as much as Warren Buffett is worth every 1.5 years. Or should I say that Warren Buffett is worth more than Exxon makes in profits per year? Either way, that fact is awesome in every sense of the word.

That also have some Microsoft, Merck, and General Electric, which I think indicates astute dividend management because all three of those companies are in the act of accelerating their dividend payout ratios (where they are in that sweet spot where the dividend growth rate is noticeably higher than the profit growth rate for a while, and you get to be the one collecting the bigger checks).

If I were perusing through 401(k) documents and were looking for large-cap funds that truly have a “buy it and forget it” style, which I define to mean that you can be reasonably confident that wealth will get built over the long-term if you keep adding to the fund every two weeks for years and years, I would want something like the Vanguard Equity Income Fund. If I were looking at a self-directed account, I’d just cut out the middleman and own the companies outright, but for someone in search of a safe, go-to fund, the Vanguard Equity Income takes care of business by giving you ownership slices of the best pieces of American business.

Source: The Vanguard Equity Income Fund