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Dividend University

The Top 3 Dividend Growth ETFs

Bob Ciura Jul 13, 2016


Dividend stocks are very popular right now, and it is easy to see why. As a source of real return, dividends provide downside protection when markets are falling. Then, when markets rise again, dividends offer a nice boost to total returns.


Over the past several years, investors looking for income have flocked to U.S. equities. This is because suitable levels of income are hard to find across many asset classes. With interest rates near historic lows, bonds pay relatively low interest, compared to dividend stocks. Investors with spare cash sitting in bank savings accounts or certificates of deposit are earning little to no interest.

As a result, there is a high demand for secure yield. Many U.S. stocks pay dividend yields higher than the yield on the 10-Year U.S. Treasury Bond. The current investing climate is one of very low rates. To satisfy their hunger for income, investors should look to these exchange-traded funds that invest in the best dividend growth stocks.


Vanguard Dividend Appreciation ETF Liquid error: internal


VIG is arguably the most well-known dividend growth ETF. The fund has total assets in excess of $25 billion. Vanguard is famous for low-cost funds and has an annual expense ratio of 0.09%, which is lower than 91% of average funds with similar holdings. (VIG) is diversified across sectors, with 185 individual holdings in the portfolio.

VIG seeks to track the performance of the Dividend Achievers, which is a group of companies that have raised their dividends for at least 10 consecutive years. VIG has generated 10% average annual returns over the past five years, and has returned 7% on average since inception.

The fund invests heavily in the industrials and consumer goods sectors, which collectively make up 46% of net assets. The top three holdings are Johnson & Johnson (JNJ ), Microsoft (MSFT ) and Coca-Cola (KO ). The top 10 holdings make up 30% of the portfolio.


iShares Select Dividend ETF Liquid error: internal Yield 3.1%


DVY seeks to invest in high dividend paying equities, across a broad mix of sectors and market capitalizations. In all, the fund holds 100 stocks that have paid dividends for at least five years.

The top three holdings for (DVY) are Lockheed Martin (LMT ), CME Group (% dividend CME %} and Chevron Corp. (CVX ). This fund invests in stocks that have P/E ratios of 19 on average. There are 95 current holdings in the portfolio.

DVY has performed very well for an extended period. The fund returned 17% in total returns over the past one year, and returned 8% per year on average since inception.

Among its sector breakdown, utilities are the heaviest weighting with 31% of the ETF market value. Next are financials and industrials, with 13% and 12%, respectively. The lowest weighted sector is information technology at 1.5% of assets. With such a high allocation to defensive sectors, DVY has a beta value of 0.65. It has a very low annual expense ratio of 0.39%.


iShares Core Dividend Growth Liquid error: internal


DGRO aims to invest in U.S. stocks with a preference for companies that raise dividends on a regular basis. The fund has a distribution yield of 2.5%. DGRO has a lower dividend yield than DVY by approximately 60 basis points, but DGRO makes up for this with a focus on higher dividend growth. The fund employs a screening strategy to place emphasis on stocks that grow their dividends at high rates each year. The top three holdings are General Electric (GE ), Johnson & Johnson and Exxon Mobil (XOM ). This fund has invested 16% of its assets in consumer staples and another 15% in industrials. It has avoided sectors that are heavily comprised of high-yield, low dividend growth stocks like utilities and telecommunications, which represent just 5% and 0% of total assets, respectively.

DGRO is highly diversified, with 425 holdings across multiple sectors. And the fund has an extremely low 0.12% annual expense ratio. DGRO generated 8% in total returns over the past one year, and returned 6% per year on average since inception.


The Bottom Line


VIG, DGRO and DVY all invest in high-quality, blue chip dividend stocks. One of the advantages of investing in ETFs versus mutual funds is that they have low costs. In addition, ETFs offer investors all-day tradability, whereas mutual funds are priced only once, at the end of the trading day. And, these ETFs all have beta values less than 1.0, meaning they are less volatile than the S&P 500 on average.

As the U.S. equity market sits near a record high, the S&P 500 dividend yield has fallen to 2%. The three dividend growth funds listed offer dividend yields that are higher than 2%, and also offer above-average dividend growth as well.

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