Vanguard dividend fund shuts out new money

At a time when dividends and buybacks are reaching a peak, signs the trend could be slowing.

The market is showing signs that companies can't keep issuing dividends to investors at the record pace they have developed, and the hunt for yield just got a little harder.

Vanguard is shutting new investors out of its $30 billion Dividend Growth mutual fund, which has seen $3 billion in cash inflows over the last 6 months and nearly doubled in size in the last three years, the investment manager said.

"Vanguard is proactively taking steps to slow strong cash flows to help ensure that the advisor's ability to produce competitive long-term results for investors is not compromised," Vanguard CEO Bill McNabb said in a statement Thursday. "We have long been committed to protecting the interests of our funds' shareholders, and demonstrate this conviction by closing or restricting funds to stem further growth."

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The Vanguard dividend growth fund posted double-digit percentage returns over both three- (10.42 percent) and five-year (13.22 percent) time frames for periods ended June 30. But recently, there have been signs that the market's ability to give investors quarterly dividends may have peaked, though the fund is still up 7.45 percent year to date.

Dividends per share amounted for $43.90 for the trailing 12 months ending in the first quarter of this year, representing a 7.5 percent year-over-year growth rate, FactSet analysts reported in June.

However, analysts said they think dividends per share growth for the S&P 500 will slow to less than 5 percent. With not only dividends but also buybacks pushing all-time highs, activist investors who have agitated boards for more cash payouts are now shifting toward longer campaigns, management changes and mergers and acquisitions instead.

One of the ways corporate boards have kept activists at bay is issuing dividends and buybacks not from cash on hand but from taking on new debt at a time when rates are at historic lows. After years of incurring billions more in debt to quell activists' thirst, corporate debt has shot up correspondingly. With corporate earnings slumping, FactSet analysts think the pace of dividends is set to pull back.

"One of the consequences of lower earnings has been a smaller number of companies increasing their dividends per share and a larger number keeping [dividends] stable," FactSet analysts wrote.