With interest rates at rock bottom, income-hungry investors have been throwing billions at dividend-paying stocks. Now, the nation's largest mutual fund company by assets is turning some of them away.
On Thursday, Vanguard Group said one of it's hottest actively managed mutual funds, the $30 billion Vanguard Dividend Growth , would no longer accept new accounts. (Existing investors won't be affected.) The problem: Over the past six months investors have poured in roughly $3 billion in new money. During the past three years, the fund's assets have roughly doubled.
That should come as no surprise to anyone who has followed the stock market. Economic jitters — most recently the Brexit vote — have kept interest rates low, even as the U.S. economy improves. With many dividend stocks out-yielding Treasury bonds, investors have been chasing after them, pushing their prices upwards. As a group, dividend stocks returned about 12.3% annually over the past three years, vs. 10.9% for the market as a whole. But experts warn these stocks are no longer cheap. While dividend stocks traditionally trade at a discount to the market, today they are more richly valued — at about 20.4 times earnings, compared to about 19.9 times for the broad market. The means if the market takes another dip, as it did earlier this year, they could be hit hard.
It's not unusual for mutual funds to stop accepting new investors. Vanguard has several other funds that also bar new accounts. A sudden influx of cash can make portfolio managers' jobs more difficult, if they have trouble finding enough cheap stocks they are willing to buy at the moment the funds receive the cash influx. A Vanguard spokeswoman said the move was designed to protect existing investors in the fund and wasn't necessarily a verdict on whether Vanguard believed dividend stocks have gotten too rich for their own good. The company's dividend-oriented index funds remain open to new investors.
All the same, investors should consider themselves warned.