In Volatile Markets, Income Investors Must Choose: High Yields or Steady Payouts.

As 2022 approaches its midpoint with deepening concerns about recession and inflation, stocks with higher yields have performed relatively better than those with faster-growing payouts.

But Donald Kilbride, the portfolio manager of the $53 billion

Vanguard Dividend Growth

fund (ticker: VDIGX), which focuses on rising payouts, not yield, is taking that in stride.

As of June 21, the Vanguard fund’s total return this year was minus 12.5%. Although that beat the S&P 500’s decline of around 22%, it trailed the

iShares Core High Dividend

exchange-traded fund’s (HDV) small gain of 0.2% and the

Vanguard High Dividend Yield

ETF’s (VYM) return of minus 8.8%.

“Our perspective tends to be very, very long term,” Kilbride tells Barron’s. “It’s all about compounding.”

Kilbride, who is also a portfolio manager at Wellington Management, has played a key role running the Vanguard fund since 2006. The portfolio’s 15-year annual return was recently 9.25%, besting Morningstar’s category average of 7.46% and the S&P 500’s result of 8.5 %. The fund holds 42 stocks.

Kilbride historically has looked for stocks that are growing their dividends “by a nice cushion” above the inflation rate. That has gotten trickier lately as inflation has spiked, most recently to 8.6% for the 12 months that ended on May 31.

Still, he’s not concerned about how the market has gravitated to higher-yielding stocks. “We try to find universal growth in dividends,” Kilbride says. “Yield has little, if anything, to do with our process.”

Some funds that emphasize higher-yielding stocks have been helped by the surge in energy shares, which have made big gains on rising oil and natural-gas prices. The dividend yield for energy stocks in the S&P 500 was recently around 3.6%, versus 1.7% for the broader index, according to FactSet.

Through the close on June 22, S&P 500 energy stocks had returned more than 30% this year, the only one of the index’s 11 sectors to notch a positive return over that stretch.

Lan Tran, an associate analyst of passive strategies at Morningstar, points out that “dividend growth funds have [underweighted] energy versus high-yield funds.”

That has definitely been a headwind for dividend growth funds this year. “Dividend growth funds have been underweight energy due to either stricter dividend history criteria, or fundamentals screens,” Tran adds.

Peter Fisher, a portfolio manager at Wellington Management who works closely with Kilbride, points out that sectors like energy have done well partly owing to inflation concerns. Energy is often seen as a hedge against inflation.

Fisher characterizes energy as “more of a value sector,” adding that it differs from “the kinds of quality, steady growers we tend to own.”

As of March 31, the fund’s top holdings included

UnitedHealth Group

(UNH), which yields 1.3%;

Johnson & Johnson

(JNJ), 2.6%;


(CL), 2.4%; and


(KO), 2.9%.

There’s no doubt the market’s tilt toward value has helped dividend funds focused on higher yields, especially funds with decent energy weightings. As of June 21, the Russell 1000 Value Index had returned about minus 13% this year, well ahead of the corresponding growth index, which was off 29%.

ETF / Ticker YTD Return AUM (bil) Expense Ratio
iShares Core High Dividend / HDV 0.2% $12.6 0.08%
Vanguard High Dividend Yield / VYM -8.8 42.4 0.06
iShares Core Dividend Growth / DGRO -14.9 21.4 0.08
Vanguard Dividend Appreciation / VIG -17.2 58.8 0.06

Note: Data as of June 21, AUM=assets under management

Source: Morningstar

At the end of last month, the Vanguard High Dividend Yield ETF had about a 10% weighting in energy, the fourth largest among its various sectors. As of June 21, energy was the second-largest sector weighting for the iShares Core High Dividend ETF at nearly 19%.

The rise in inflation—and its impact on company performance—is another consideration for investors as they select stocks.

“In order win in that game, you’ve got to be able to price,” says Kilbride, who cites some key pillars of pricing power: innovative products, strong brands, and being able to sell valuables, though not necessarily super-expensive , components to companies.

One of his holdings is UnitedHealth, “which does have some exposure to the economy,” he says. UnitedHealth has large businesses that include health insurance, pharmacy benefit management, and healthcare analytics used by other companies, according to Morningstar.

“Healthcare is exposed to a long-term, strong demand curve,” says Kilbride. “Given where demographics are and given where innovation is, we are only going to be consuming more healthcare globally.”

The stock’s recent yield of 1.3% is pretty modest, but it has been growing at a double-digit clip.

Another of the fund’s holdings is consumer-products company Colgate-Palmolive. “We’re going to brush our teeth regardless of whether or not there’s a recession,” says Fisher. Staples companies, he adds, “by their very nature are very, very resilient to an economic downturn.”

Colgate-Palmolive has had fairly small but steady dividend hikes in recent years. Last month, the company paid a quarterly disbursement of 47 cents a share, up from 45 cents previously.

Stepping back, Kilbride points out that stocks with high yields can be risky, their recent relative outperformance notwithstanding. “It sometimes can be the case that the market just doesn’t have a lot of confidence in that dividend,” he says.

That’s especially true if the stock price has plummeted, pushing up the yield ahead of a dividend cut or suspension.

Dividend fund managers are approaching this volatile environment in a variety of ways. For example, John Kornitzer, a longtime co-manager of the $455 million

Buffalo Flexible Income

fund (BUFBX), has lightened up on some energy holdings like


(HES), which got too expensive for him. He used those proceeds to invest in more attractively valued sectors such as pharmaceuticals and banks. One stock he added was regional bank

Citizens Financial Group

(CFG), which was recently yielding 4.3%.

Looking ahead, Kornitzer says he expects companies to face some grilling during coming earnings calls about price increases, how business is holding up, and if margins are getting squeezed—all off which affect dividend policy. “A lot of questions are going to be answered in second-quarter earnings,” he says.

That applies to dividend investors, as well.

Write to Lawrence C. Strauss at


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