Seeking Alpha

A Review Of Dividend Growth ETFs

by: The Part-time Investor
The Part-time Investor
Long only, long-term horizon, dividend investing, value

Some might feel that buying dividend growth ETFs is the easiest way to have a dividend growth portfolio.

The returns of the dividend growth ETFs have not matched the market or a personally managed dividend growth portfolio.

The ETFs hold many stocks that have poor quality and are overvalued.

With all the resources available to us, it doesn't take much time to build and manage a dividend growth portfolio which will beat most ETFs.

One of my primary goals as I manage my dividend growth portfolio is to keep things simple. This is something I discuss in almost all the articles I write. I believe that by keeping things simple, it is easier for an investor to stick to their investment plan. I've never seen any evidence that making a plan more complicated leads to better results.

With this in mind, in the comment section of almost all my portfolio updates, I often get the question "why not put all your money into ETFs. If you really want to keep things simple, there's nothing simpler than that". My response is usually something along the lines of that the dividend growth investing ("DGI") ETFs I'm aware of hold a lot of stocks in their portfolios that I would want nothing to do with. And that because of this, I believe their results will suffer. I want control over exactly which stocks I own, and I do not want to leave it up to someone who's criteria for purchase does not match mine as to which stocks will be owned.

But, in the end, it is the results that matter. And although I follow a dividend growth ETF (SDY) and a dividend growth mutual fund (VDIGX) as benchmarks for my portfolio and have beaten those two funds over the life of my portfolio, I realize that there are more "DGI" ETFs out there and perhaps some of them are producing superior returns. Perhaps there are a few that are worth investing in. So, I set out to review all the "DGI" ETFs I could find to evaluate their holdings and performance.

I started the review by searching the internet for "dividend growth ETFs". To qualify for inclusion, an ETF had to specifically say in their prospectus that they only invest in stocks that have raised their dividend for at least the past 5 years in a row. In some cases, it was 25 years (NOBL), 20 years (VIG), or 15 years (REGL), but most were either 5 or 10 years. I was surprised that I only found 8 ETFs that meet this criterion. But I guess that shows how little the DGI philosophy is used by the "professionals". This is surprising considering how successful it has proven to be in the past.

Here are the ETFs which met the above criteria, and the description of each.

(The following information is from

NOBL tracks an equal-weighted index of S&P 500 constituents that have increased dividend payments annually for at least 25 years.

SDY tracks a yield-weighted index of dividend-paying companies from the S&P 1500 Composite Index that has increased dividends for at least 20 consecutive years.

REGL tracks an equal-weighted index of mid-cap companies that have increased their dividends for at least 15-consecutive years.

SMDV tracks an index of US small-cap stocks with a 10-year record of increasing dividends. Stocks are equally weighted.

VIG tracks a market-cap-weighted index of US companies that have increased their annual dividends for 10 or more consecutive years.

VSDA selects US large- and mid-cap companies that have grown their dividends successfully over the past five or more years.

PFM tracks a market-cap-weighted index of dividend-paying US companies that have increased their annual dividends for 10 or more consecutive years.

SDVY screens for small- and mid-cap companies with increasing dividends over the past five years.

Top ten holdings for each ETF

Since the point of this exercise is to see if DGI ETFs outperform the market (SPY) or my own portfolio, for each of the 8 ETFs, I looked up the total annual return going back to 1/2/2013. This is when I started posting my KISS portfolio, so I used this date as the starting point for the comparisons. If an ETF was created after 1/2/2013, I used the actual inception date for that ETF as the beginning of the study period and compared it to the KISS portfolio returns from that same date. In all cases, I also compared the ETF, and the KISS portfolio, to SPY (the market ETF) to compare to the S&P 500 returns.

Here are the results:

All these returns were obtained using the returns calculator on (DRIP Returns Calculator | Dividend Channel), from the posted starting date up until 1/9/20.

Numbers in red indicate that the ETF trailed both the KISS portfolio and SPY, over the time period in question.

Numbers in green indicate that the ETF outperformed both the KISS portfolio and SPY, over the time period in question.

Numbers in yellow indicate that the ETF trailed both the KISS portfolio and SPY, but that SPY beat the KISS portfolio, over the time period in question.


I believe the point of the question, "why not just use ETFs?" is that one might believe that buying an ETF is much easier than managing a dividend growth portfolio and will give similar results. And, in general, I agree that if you're going to put more work into your investing, then you better expect to get better returns. But I think the above results demonstrate why it might be worth the small amount of extra work to run your own "DGI" portfolio, such as the KISS portfolio, rather than buying an ETF. In 6 out of the 8 cases, the personally managed portfolio beat the ETF by at least 1% annually. And, in some cases, by as much as 3%. Only one ETF, VSDA, has beaten SPY and the KISS portfolio while it has been in existence. And that has only been since June of 2017. I wouldn't be surprised if after a few more years it starts to fall behind.

As I mentioned earlier, I believe one possible reason for this poorer performance of the ETFs is that many ETFs hold so many stocks that there's probably some real duds in the portfolio that hold down the returns. PFM, for example, has 259 stocks in the portfolio. I find it hard to believe that all of those stocks are quality ones. NOBL and REGL hold a more reasonable 58 and 51 stocks, respectively, but due to the rules of each of them, they must own ALL the stocks in their category which have raised their dividend for either 25 years (NOBL) or 15 years (REGL). Therefore, no consideration is given to the valuation of the stocks. Even if some of those stocks are overvalued, they still must be owned by these ETFs. Over time, overvalued stocks are not going to perform as well as undervalued, or fairly valued stocks. By managing your own portfolio, you can screen for, and eliminate, poor quality and overvalued stocks. Over the long term, this should allow you to beat the "professionally managed" ETFs, even the dedicated dividend growth ones, just like I have been able to do with the KISS portfolio.

Also, all these ETFs, except for VIG, have a relatively high expense ratio which will be a drag on the returns. Over many years, this will negatively affect how well the ETFs do.

And one more point. I don't actually believe that buying ETFs is really that much simpler, and less time consuming, than managing your own portfolio. So, much work is already done for us, by many different websites, that screening for quality, undervalued dividend growth stocks only takes an hour or two every few months. The CCC list maintained by Justin Law, FAST Graphs by Chuck Carnevale, and are some of the examples of the resources available to us to make building and managing a dividend growth portfolio relatively easy and time efficient.

In the end, I think the time put into managing your own portfolio, selecting only quality stocks which are undervalued or at worst fairly valued, will be well worth the small amount of extra effort you have to put in to achieve the excellent returns we are all trying for.

Thank you for reading my article. I welcome your comments and criticisms.

PS. I haven't even mentioned the dividend income you can create for yourself by managing your own portfolio vs. accepting that which an ETF will provide for you. There's no doubt you can do much better for yourself with your own portfolio. But, I will save this topic for a future article.

Disclosure: I am/we are long NOBL, REGL. 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.