Steady Dividends, Sturdy Fund

In times of economic uncertainty, investors favor conservative fare until market turmoil subsides. Benjamin Shepherd profiled such a bastion last October, Vanguard Wellesley Income (VWINX). The fund perennially appeared in The Rukeyser 100 until 2008.

The fund’s managers, W. Michael Reckmeyer and John Keogh, favor a conservative asset mix of bonds, equities and cash. The fund reported that its most recent equity allocation stood at 37.4 percent, while its bond allocation stood at 60.3 percent.

The fund prefers large companies with established businesses, solid financial positions, and room for growth. Vanguard Wellesley Income invests almost exclusively in stocks with dividend yields exceeding that of the S&P 500, typically in the 3.5 to 5 percent range. The fund tends to buy and hold for the long term, which is evident in the fund’s low 30.3 percent turnover rate.

Reckmeyer manages the equity sleeve, selecting stocks he believes trade below fair value. Keogh stewards the bond portfolio by looking for companies with stable to improving credit quality and strong cash flow.

The fund has generated positive annual returns in all but one calendar year since 2001. Vanguard Wellesley Income lost 9.8 percent in 2008 during the height of the bear market. By comparison, the fund’s category peers lost 18.6 percent that year. The fund also outperformed its peers in eight of the past 10 years–and experienced negative returns in only four calendar years since its launch in 1976.

Vanguard Wellesley Income has returned 6.3 percent since recommendation in October 2010. Its has a reasonable 0.28 percent expense ratio, compared to a category average of 0.90 percent.

With its history of generating solid returns, this risk-averse fund is a core holding for conservative investors.