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Evaluating the Vanguard International High Dividend Yield Index Fund

Quick housekeeping note: My wife and I are in the middle of a move from Colorado to St. Louis. As a result of that and a minor medical issue (nothing to worry about, but it’s taking up a fair bit of time), there will be no articles until Monday 11/7, at which point the publishing schedule will resume as normal.

A reader writes in, asking:

“Have you looked at the new international high dividend yield index fund that Vanguard released earlier this year? I think it looks appealing, but it’s new so hardly has any track record. I’d be interested to hear your thoughts.”

With regard to dividend strategies in general, there’s no economic advantage to receiving dividends rather than an equal amount of price appreciation. (And in fact, there’s a disadvantage, if the fund is held in a taxable account because the dividends will be taxed immediately whereas capital gains tax isn’t incurred until holdings are sold. And capital gains tax can sometimes be avoided completely if the holdings are left to heirs.)

So a dividend strategy is only useful if there’s some reason to think that dividend stocks will outperform other stocks of similar risk.

Overweighting high-dividend stocks relative to their market weight often results in a portfolio that is heavy on value stocks — because value stocks tend to have higher than average dividends.* And both Vanguard and Morningstar do classify the new Vanguard International High Dividend Yield Index Fund as an international “large value” fund.

So how does the new fund compare to Vanguard’s existing foreign large value fund (i.e., the Vanguard International Value Fund)? The following chart (made with the Morningstar website) shows how the two have performed since the inception date of the new fund. The blue line is the new International High Dividend Yield Index Fund, and the orange line is the older International Value Fund.

international-dividend

As you can see, they have tracked each other very closely.

As far as differences, the new fund does have a slightly lower expense ratio (0.30% for Admiral shares, as opposed to 0.46% for the International Value Fund), which is certainly a good thing.

And, unlike the existing actively managed fund, there’s no possibility that the new dividend index fund will experience outperformance or underperformance due to good/bad individual stock selection. Personally, I see that as a good thing. But others may disagree if they’re more optimistic about the value of low-cost active management.

In other words, if you’re looking for an international large-cap value fund to add to your portfolio, the new Vanguard International High Dividend Yield Index Fund looks like a perfectly good choice. I would not say, however, that it is anything particularly groundbreaking compared to Vanguard’s older offerings.

*Brief tangent: I recently encountered this article by Rick Ferri, which does a great job explaining why the value premium may be directly tied to dividends.

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