This is a very interesting discussion.
IMO, there are two questions here:
+ Is VTSMX (total market index) better than VDIGX?
+ Is VDIGX a good fund for taxable account?
Lets me see what the answer is to the second question of VDGIX/VTSMX for a taxable account. I have VDIGX in my taxable account portfolio, but understanding the context is probably important as well.
I try to invest in different strategies for my taxable account, with two buckets for each strategy...to spread the risk a bit more. I have invested in appx 5 different strategies.
+ MUNIs...federal+state tax free
+ Balanced fund....VTMFX...federal tax free + some state tax free
+ Dividend Investing: current high div (VHDYX) and div growth (VDIGX)....100% qualified dividends (15% tax) + AMT free
+ Capital growth (VTCLX, VTMSX)..does generate some capital gains
+ International (VTMGX)...does generate dividends...almost 100% qualified dividends (15% tax), gets some foreign tax deduction.
So, VDIGX takes the place of a dividend growth fund in my portfolio in my taxable account. The advantages that I considered were
+ 49 stocks appx...less diversification...but a longer term approach...almost a buy+hold strategy...i.e. limits short term capital gains
+ good fund family...Vanguard/Wellington
+ Considered a solid fund for a down market
+ appx 10% is foreign market...so, some diversification across geographies.
Coming down to brute force numbers, here is the dividend distribution for the last year.
VTSMX
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Distribution Most Recent
Type Distribution Record Date Reinvest Date Payable Date Reinvest Price Distribution Yield SEC Yield
Dividend $0.25800 12/18/2014 12/19/2014 12/22/2014 $51.75 — 1.76% B
Dividend $0.21100 09/22/2014 09/23/2014 09/24/2014 $49.58 — —
Dividend $0.19000 06/20/2014 06/23/2014 06/24/2014 $49.49 — —
Dividend $0.19200 03/21/2014 03/24/2014 03/25/2014 $47.08 — —
--------
$0.851
tax = $0.851 * 15% = $.12765
VDIGX
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Distribution Most Recent
Type Distribution Record Date Reinvest Date Payable Date Reinvest Price Distribution Yield SEC Yield
Dividend $0.21800 12/19/2014 12/22/2014 12/23/2014 $23.37 — 2.10% B
ST Cap Gain $0.07300 12/19/2014 12/22/2014 12/23/2014 $23.37 — —
LT Cap Gain $0.24700 12/19/2014 12/22/2014 12/23/2014 $23.37 — —
Dividend $0.19900 06/19/2014 06/20/2014 06/23/2014 $22.18 — —
Dividend $0.02300 03/20/2014 03/21/2014 03/24/2014 $21.40 — —
ST Cap Gain $0.01200 03/20/2014 03/21/2014 03/24/2014 $21.40 — —
LT Cap Gain $0.01600 03/20/2014 03/21/2014 03/24/2014 $21.40 — —
--------
$0.788
tax = $.703*15% (div + long term cap gains portion) + .085*33% (short term cap gains)
= $.10545 + 0.02805
= $.1335
Here is my conclusion: Just based off of the dividends and capital gains distribution over the last year, VDIGX pays a bit more tax, assuming short term cap gains max bracket of 33%. Note that the .31% expense ratio also is a downer for VDIGX. VTMSX wins this round in the short term.
So, would I change my VDIGX fund investment? Not now for two reasons:
+ It is a portfolio diversification for me in the dividend growth bracket...all companies in VDIGX are not in the index.e.x, 10% is foreign inv.
+ It is a less volatile fund...a good fund to keep during market dips...if you consider the last 5+ years of bull market, then a market dip is logical in the next year or two.
Lets hope VDIGX earns its expense ratio.
What do you guys and gals think about this?
PS: This thread has been a learning experience for me. Thanks for the question and the comments from diff people. It is always good to revisit ones assumptions and test them once in a while :-)