Vanguard High Yield Corporate - Another New Low in Dividend

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Electron
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Vanguard High Yield Corporate - Another New Low in Dividend

Post by Electron » Mon Feb 05, 2018 2:30 pm

Attached is a chart showing the dividend in dollars per share paid by Vanguard High Yield Corporate (VWEHX).

The most recent dividend of $0.02224 per share represents a new low. The dividend appears to have been in a long term decline. The earliest dividend data I have shows the dividend at $0.084 in July 1989.

Any thoughts on why the dividend continues to drop to this degree?

I realize that the dividends paid by bond funds in general have been declining as rates have declined but not to the same extent as seen in VWEHX. Total Return is ultimately more important but it would still be interesting to understand the reasons for the significant decline in the monthly payout. The fund tends to invest mostly in B and BB rated bonds and I'd be surprised if defaults have been a significant factor.

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Re: Vanguard High Yield Corporate - Another New Low in Dividend

Post by lack_ey » Mon Feb 05, 2018 2:46 pm

All else equal, defaults over the long run should decrease the NAV and thus the per-share dividends. That said, the NAV right now is on an upswing from credit spreads narrowing.

But mostly what you're seeing is overall lower yields on junk bonds. Around 2013 through now have had pretty low junk bond yields, except for the spike around 2015/2016. Now most of the bonds should be from this lower-yielding period. Before the financial crisis, yields were higher on bonds overall; in the few years after, credit spreads were definitely higher than they are now. Now we have lowish Treasury bond yields and then low credit spreads.

There are also maybe some temporary effects based on the exact underlying portfolio. Some fluctuations happen now and then and don't mean much. It's also possible the manager decided to derisk a bit.

If you look at index funds in the space like iShares iBoxx $ High Yield Corporate Bond ETF (HYG), there's been a similar trend but the most recent dividend is not notable.

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Re: Vanguard High Yield Corporate - Another New Low in Dividend

Post by Electron » Mon Feb 05, 2018 5:19 pm

lack_ey wrote:
Mon Feb 05, 2018 2:46 pm
There are also maybe some temporary effects based on the exact underlying portfolio. Some fluctuations happen now and then and don't mean much. It's also possible the manager decided to derisk a bit.
Thanks for your comments. I had the same feeling about the fund possibly lowering risk recently. Vanguard now shows the Distribution Yield on their site and it dropped to 4.41% from 5.12% in the previous month.

I should have noted that the short term variations in the chart are often related to the number of days in the month. In particular, you will notice that February dividends dip noticeably.

One concern I have about Vanguard's Actively Managed bond funds is the use of derivatives. We really don't have any information on how performance is affected month to month. I have seen the dividend vary considerably in Vanguard's Short Term Investment Grade fund. The dividend showed a 28% drop in September 2016 relative to the previous month. A detailed study of the Annual Report showed the use of several different types of derivatives and I believe I saw significant losses in Futures contracts. One complication in understanding the effect of those positions is the fund accounting that is used. However, it might make sense that short term losses in derivatives would be taken from the dividend rather than NAV.
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Re: Vanguard High Yield Corporate - Another New Low in Dividend

Post by FactualFran » Tue Feb 06, 2018 3:27 pm

Electron wrote:
Mon Feb 05, 2018 2:30 pm
The most recent dividend of $0.02224 per share represents a new low. The dividend appears to have been in a long term decline. The earliest dividend data I have shows the dividend at $0.084 in July 1989.
The highest income distribution per share was $0.235 in Jan. 1983. It was the end of the fiscal year distribution that likely had to make up for the other distributions during the fiscal year not having been enough for the fund to conform to IRS regulations. The monthly income distributions during the rest of the fiscal year were $0.095 per share.

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Re: Vanguard High Yield Corporate - Another New Low in Dividend

Post by alex_686 » Tue Feb 06, 2018 3:33 pm

Bond yields have 2 components, the risk free rate (i.e. US Treasury) and the "Credit Spread" (i.e, the extra interest you get for investing in risky stuff).

Yields of Treasury have been falling and are low. The credit spread has also been falling. I don't have a good cite for high yield but here is one for BAA - just one step above junk:

https://fred.stlouisfed.org/series/BAA10Y

I have to admit that I was shocked when I saw this last week. I knew they were low but not this low. In this context it makes perfect sense that the dividends are low on this fund.

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Re: Vanguard High Yield Corporate - Another New Low in Dividend

Post by Electron » Wed Feb 07, 2018 3:38 pm

Thanks FactualFran and alex_686 for the additional comments. I'd forgotten that Vanguard Fixed Income funds paid fixed monthly dividends at one time. The very low credit spread on BAA bonds is a surprise to me as well.

I should note that Vanguard High Yield Corporate has seen the NAV decline significantly since inception along with the dividend payout. Here is an earlier discussion by Rick Ferri.

viewtopic.php?p=179926#p179926

"I had a long conversation with the Vanguard analyst on the subject of VWEHX. It is anticipated that the annual NAV loss per share will remain in the 1.5% range going forward due to downgrades, defaults, early calls, premium bond accretion, and bad market timing by individual investors."

On the subject of the most recent dividend, I'm now wondering if derivatives could have been a factor in the lower payout. The latest Semiannual Report provides information on both Forward Currency Contracts and Credit Default Swaps. Credit Default Swaps are used to adjust the overall credit risk of the fund or to actively overweight or underweight credit risk to a specific issuer or group of issuers. In reading the fine print in the report, it sounds as though collateral is pledged, contracts are valued daily, and any amount due is settled within two business days.
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Re: Vanguard High Yield Corporate - Another New Low in Dividend

Post by Electron » Fri Feb 09, 2018 1:47 pm

The new low in the dividend may be an anomaly of some sort. I just checked the accrued dividend in my account which reflects eight days, and a dividend projected to 31 days exceeds both the January and December dividends by a significant amount. This could fit in with my thoughts that derivatives might have been a factor in the lower January payout.

I should have noted that the link I posted with comments by Rick Ferri was posted in March 2008. It is very interesting to read the thread in that context and there are also a number of comments by Larry Swedroe. Rick Ferri made a projection of 7.2% for future returns in the fund. I just checked Morningstar and the ten year return is shown as 6.91%.
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Re: Vanguard High Yield Corporate - Another New Low in Dividend

Post by Rick Ferri » Sat Feb 10, 2018 11:44 am

The 0.3% difference in annualized 10-year return between my 7.2% projected and 6.9% actual was the roll-down in return on income reinvestment over the past five years as interest rates fell. It was not due to greater defaults. Going forward, we may see that reverse as rates rise. Hence, a fair projection for VWEAX over the next ten years is approximately 4.0% (5.2% yield - 1.5% principal loss + 0.3% roll-up in yield reinvestment.)

This isn’t much higher than a 3.5% expected return from the Vanguard Intermediate-term Corporate Bond Fund (VICSX). But be careful here. It’s not a straight credit risk decision. The duration (interest rate risk) of VICSX is higher than VWEAX by about 1.8 years, so you’re substituting credit risk for interest rate risk.
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Re: Vanguard High Yield Corporate - Another New Low in Dividend

Post by Electron » Sun Feb 11, 2018 5:20 pm

Rick Ferri wrote:
Sat Feb 10, 2018 11:44 am
The 0.3% difference in annualized 10-year return between my 7.2% projected and 6.9% actual was the roll-down in return on income reinvestment over the past five years as interest rates fell. It was not due to greater defaults. Going forward, we may see that reverse as rates rise. Hence, a fair projection for VWEAX over the next ten years is approximately 4.0% (5.2% yield - 1.5% principal loss + 0.3% roll-up in yield reinvestment.)
The difference between the projected and actual returns seems quite reasonable considering that the period included the 2008 Financial Crisis. If you look at the chart posted at the start of this thread, you will note that the dividend declined in early 2009 and then rebounded. It would be very interesting if we had information on share purchases, share redemptions, changes in the portfolio, and any gains or losses from derivatives. Portfolio turnover was only 21% in 2009 so it is possible that derivatives were a factor in the lower dividend.

Another interesting observation on the chart is that the NAV has been relatively stable since late 2010 without an overall downward bias. The fund also had three small capital gains distributions during that period.

In looking at the performance of Vanguard High Yield Corporate on Morningstar, I noticed that the fund has outperformed the Total Bond Market Index fund over all periods shown which go up to 15 years. The margin is quite significant. I then added the High Yield Bond ETF with symbol HYG. Vanguard High Yield Corporate has outperformed the ETF as well over all time periods shown.

That brings up an interesting article that I read a few years ago. Open ended High Yield Bond funds appear to be a better choice than High Yield Bond ETFs. The ETFs invest in a High Yield Bond Index and may not get the best pricing on all securities when cash inflows or outflows rise significantly. The open ended funds have taken advantage of those periods and traded bonds with the ETFs sometimes at very attractive prices.
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