Yes Virginia, There Is A Dividend Growth ETF Portfolio That Delivers

Includes: MLPA, MORT, VYM
by: Dale Roberts

Yes, you can wrap up a few ETFs and present a nice bundle of dividends and dividend growth that meets the needs of dividend growth investors. It's a nice surprise.

A few proponents of dividend growth investing who write for Seeking Alpha have been disappointed in the dividend growth options offered in ETF form. And they claim that there is no ETF that would satisfy the parameters of true dividend growth and attractive yield. As a basic starting point, most dividend growth investors are searching for a healthy yield and considerable dividend growth. That is, the companies have increased their dividends year over year for 10, 15 or 25 years.

Generally they like to see a combination of yield and dividend growth rate that will equal 12. For example, a company that offers a 4% yield and a dividend growth rate of 8% would deliver on the search for 12. SA writer and commentator Chowder devised that little "rule" and it has been named the Chowder Index. I'll shorten that to the ChowDex.

Given those parameters, it's true that no individual U.S. centric dividend growth ETF offers a combination of generous yield and dividend growth. The most popular dividend growth ETF, VIG from Vanguard offers a yield of 2.2% and a dividend growth rate of 9.7% ... coming in at 11.9. Dang so close.

Of course, given those numbers, VIG certainly foots the bill for the Chowder rule, hey what's (0.1) among friends? But that's just too easy - they're looking for a little more. And certainly a yield of 2.2% would mean this ETF would need plenty of time to deliver a very generous revenue stream. That said, VIG would certainly do the trick for investors with a 10-15 year (or more) time horizon - those in the wealth building stage.

There's another option from Vanguard that offers many of the popular dividend growth stocks we see in the DG stock pickers' lists - the High Yield Dividend ETF, VYM. VYM offers a more generous yield of 3.15% and a dividend growth rate of 8.5%.

VYM - Top Holdings

Exxon Mobil Corporation (NYSE:XOM), Microsoft Corporation (NASDAQ:MSFT), General Electric Co. (NYSE:GE), Chevron Corp. (NYSE:CVX), AT&T Inc. (NYSE:T), Procter & Gamble Co. (NYSE:PG), Johnson & Johnson (NYSE:JNJ), Wal-Mart Stores Inc. (NYSE:WMT), Pfizer Inc. (NYSE:PFE), Coca-Cola Co. (NYSE:KO), Philip Morris International Inc. (NYSE:PM), Merck & Co. Inc. (NYSE:MRK), Verizon Communications Inc. (NYSE:VZ), PepsiCo Inc. (NYSE:PEP), Intel Corp. (NASDAQ:INTC), Abbott Laboratories (NYSE:ABT), Home Depot Inc. (NYSE:HD), McDonald's Corp. (NYSE:MCD), United Technologies Corp. (NYSE:UTX), ConocoPhillips (NYSE:COP), 3M Co. (NYSE:MMM), Altria Group Inc. (NYSE:MO), Eli Lilly & Co. (NYSE:LLY), Colgate-Palmolive Co. (NYSE:CL), Emerson Electric Co. (NYSE:EMR), Illinois Tool Works Inc. (NYSE:ITW).

And where dividend growth stock pickers fell down in their "search" for a dividend growth ETF is that they were looking for a single ETF to foot the bill. The Vanguard examples above certainly come close and would satisfy many looking for dividends and dividend growth in their portfolio. But why not combine ETFs to juice up the yield and create more diversification? And perhaps we'll get that ChowDex above 12.

Maybe they were looking in the wrong place? As this article on Seeking Alpha pointed out, the best dividend growth ETFs are not dividend growth ETFs.

The article suggests that there are incredible dividends and dividend growth in the REIT and MLP sectors. For MLPs I am a big fan of the energy sector (hey I'm Canadian) and the stable utilities that are perpetual cash and dividend machines. This ETF, MLPA, offers a yield of 6% and an estimated dividend growth rate of 12%. As the ETF is just over one year old, I had a look at the individual top holdings to estimate the dividend growth rate history and potential. The index that the ETN tracks offers an estimated yield of 6%.

Holding this sector will also offer more diversification for the DG investor. Also, there are two Canadian companies in there, in Enbridge (NYSE:ENB) and TransCanada (NYSE:TRP), meaning that the ETF will add some international diversification as well. Ironically, those two utilities are in my portfolio as individual holdings. I hold three companies outside of ETFs - I just couldn't sell ENB and TRP. Though I did trim them after a double. They have treated me very well.

Company Yield Dividend Growth Rate
Enterprise Products Partners L.P. (NYSE:EPD) 4.4% 7.9%
El Paso (NYSE:EPB) 5.7% 36%
Kinder Morgan Energy Partners, L.P. (NYSE:KMP) 5.75% 11.0%
Buckeye Partners, L.P. (NYSE:BPL) 7% 5%
MarkWest Energy Partners LP (NYSE:MWE) 5.6% 12.6%
Plains All American Pipeline, L.P. (NYSE:PAA) 4.0% 8.4%
Energy Transfer Partners, L.P. (NYSE:ETP) 7.0% 10.5%
Magellan Midstream Partners, L.P. (NYSE:MMP) 3.8% 12%
Enbridge Inc. 2.9% 9.5%
Energy Transfer Equity L.P. (NYSE:ETE) 4.4% 18%
Oneok Inc. (NYSE:OKE) 3.0% 16%
Spectra Energy Corp. (NYSE:SE) 4.0% 6.4%
TransCanada Corp. 3.6% 3.9%
Williams Cos Inc. (NYSE:WMB) 3.6% 10.8%
Totals / Average 4.6% 12%
Click to enlarge

As for REITs, there's the popular MORT. It's big on yield at 8%, and light on the dividend growth at 4%, but once again it hits that magic 12 on the ChowDex. But more importantly, it's going to provide even more sector diversification for the dividend growth investor.

Here are the top ten holdings of MORT representing some 70% of the ETF.

Annaly Capital Management Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), Starwood Property Trust (NYSE:STWD), Chimera Investment Corporation (NYSE:CIM), MFA Financial, Inc. (NYSE:MFA), Two Harbors Investment Corp. (NYSE:TWO), Hatteras Financial Corp. (NYSE:HTS), Invesco Mortgage Capital Inc. (NYSE:IVR), Newcastle Investment Corporation (NYSE:NCT), Cypress Sharpridge Investments (NYSE:CYS).

And here's my very simple 3-ETF portfolio suggestion for investors that want the traditional long-term potential gains expected from dividend growth stocks.


ETF Type Yield Dividend Growth % Portfolio
VYM U.S. Dividend 3.15% 8.5% 60%
MLPA Energy MLP 6.0% 12.0% 20%
MORT REIT 8.1% 4.0% 20%
Total Avg. ETF Portfolio 4.7% 8.3% 13.0 (ChowDex)
Click to enlarge

There you have it. Three purchases with a 4.7% yield and a dividend growth rate history of 8.3%. On the Chowdex, we are at a baker's dozen. With this portfolio, you don't have to watch it. You don't have to monitor the companies within. That is done for you by the index providers. An investor could rebalance quarterly, twice a year, or perhaps annually. That said, must of the rebalancing could be accomplished on an ongoing basis with the considerable income that the portfolio will be generating. When you see an ETF is underweight, add the new monies into that ETF.

This portfolio is certainly worth considering for those who do not want to manage a DG portfolio of 20-30 or more names. And it's ideal for those who are new to investing or have limited funds. It can certainly be cost prohibitive to start a stock portfolio with amounts under $20,000. What's more, it's almost impossible to have a diversified portfolio with small amounts.

That said, I would think there is certainly the likelihood that this simple 3-ETF portfolio will perform as well as many individual stock-picker portfolios. It has the numbers. It has the diversification.

Also, many investors who practice asset allocation could use these ETFs to beef up their equity yield component.


Quite simply it is possible to build a dividend growth portfolio with ETFs. With three ETFs to be exact. The portfolio's weakness, like most dividend growth portfolios, is a lack of international diversification. Many DG investors feel they have international exposure with their U.S. multinationals that are generating impressive profits overseas, but as I demonstrated in this article - sorry your dividends are not coming home any time soon.

Stay tuned, for more on how to build an even better dividend growth ETF portfolio.

Disclosure: I am long DIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Dale Roberts aka cranky is a Streetwise Coach at ING Direct Mutual Funds. Streetwise Portfolios offer Canadians low-fee, complete, index-based portfolio options. Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process.