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Vanguard's Five Best Income Funds

Investing a portion of a portfolio across several funds from the same provider, such as the best Vanguard dividend funds, can offer investors protection from market fluctuations and deliver long-term returns, explains income investing specialist Ned Piplovic, editor of DividendInvestor.

The five best Vanguard dividend funds on the list below offer a combination of high dividend income and steady capital gains and produce robust total returns. The lowest yield among these funds is 3.4% and each one of these funds has delivered a total return of more than 10% over the trailing 12 months.

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Additionally, four of these funds have also delivered double-digit percentage total returns over the past three and five years. One of the funds has been established in 2017 and, therefore, has a performance history of only two years.

Vanguard Intermediate-Term Corporate Bond Index Fund Institutional Shares (VICBX)

This low-cost index fund invests in U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility and financial companies. The vast majority of the fund’s securities — 97.4% — had maturities between five and 10 years.

As of July 31, 2019, the fund had nearly $26 billion in net assets spread across 1,784 bonds. The average net maturity was 7.5 years, with an average duration of 5.7 years and a 3.1% yield to maturity.

The fund’s most recent monthly dividend distribution was $0.091. While the monthly dividend rates fluctuate based on the income payouts of the fund’s underlying security, the $1.09 annualized dividend payout yields 3.56%.

Vanguard Emerging Markets Bond Fund Investor Shares (VEMBX)

This fund invests nearly 60% of its assets in the bonds that are issued by emerging market economies. Like other bond funds, the fund is subject to interest rate risk. Interest rates increases can reduce the prices of the fund’s underlying bonds, which will reduce the fund’s overall net asset value.

Additionally, the fact that bonds in emerging markets tend to have higher volatility and lower liquidity than bonds in developed countries is another risk factor to consider.

As of July 31, 2019, the fund’s $285 million total net assets across 137 holdings had an average effective maturity of nearly 10 years and average duration of 6.2 years. Mexican bonds had the highest share of assets with 10.3%. Indonesia (8.2%) and Russia (6.7%) rounded out the top three countries by share.

The fund distributes dividends monthly and the current annualized dividend of $0.54 yields 4.82%. The combined total return over the trailing 12 months was nearly 13.2% and the three-year total returns are approaching 21%.

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Vanguard Real Estate Index Fund Institutional Shares (VGSNX)

This fund invests in real estate investment trusts that purchase office buildings, hotels, and other real estate property. Because REITs often follow trends opposite from stocks and bonds, this fund can offer some portfolio diversification.

While REIT’s generally pay higher dividends, the narrow scope of this fund and potentially higher volatility are risk factors to keep in mind.

As of July 31, 2019, the fund had $65.4 billion in total net assets spread across 186 holdings with the top 10 holdings accounting for more than 42% of total assets. The fund has hiked its annual dividend eight times in the past nine years and its current $0.78 annualized dividend yields 3.8%.

Including the dividend income, the total one-year return was nearly 13%. Additionally, the three-year total return was 16% and the five-year total return was 42%.

Vanguard Long-Term Corporate Bond Index Fund Institutional Shares (VLCIX)

This low-cost index fund invests in U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility and financial companies, with maturities greater than 10 years.

Long-term bonds also tend to be more sensitive to interest-rate changes. Rising interest rates can reduce the price of bonds, which lowers the fund’s share price.

As of July 31, 2019, the fund held $4.8 billion in total assets allocated across 1,994 individual bonds, with an average effective maturity of 23.7 years and an average duration of 13.8 years. More than 70% of the fund’s assets are in bonds from the Industrial sector.

With nearly 17% of assets in Financial sector bonds and 12% in Utilities, the top three sectors account for 99% of the fund’s assets.

The fund pays a $0.112 monthly dividend which is equivalent to a $1.34 annualized payout and a 3.9% forward dividend yield. The fund has also produced a total return of more than 32% over the last five years.

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

This fund provides diversified exposure to medium-and high- quality investment-grade corporate bonds with an average maturity of 15 to 25 years. In line with its primary goal, the fund invests primarily in corporate bonds.

Only a small share of assets is allocated in taxable municipal bonds. This fund is well suited for investors who are looking for a security that delivers interest income.

However, investors must be aware of the increased risk from interest rate fluctuations. Interest rate increases can reduce the price of the bonds in the portfolio, which will reduce the fund’s share price. Interest rate changes have higher impact on bonds with longer-term maturities, such as the 15 to 20 years included in this fund.

As of June 30, 2019, the fund’s 917 bonds had a total net asset value of nearly $19 billion. The average effective maturity was 22.2 years with an average duration of 13.8 years. Bonds from the Industrial sector represent the majority of assets with a 44.3% share.

Financial sector bonds with 20.3% share and Utilities with a   15.3% share round out the top three sectors represented. These three sectors, when combined, account for nearly 80% of the fund’s total assets.

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