Investment Thesis
I'm often critical of dividend ETFs that seem to put yield first while ignoring total returns, but it's hard to find this fault with the iShares Core Dividend Growth ETF (NYSEARCA:DGRO). Since its inception nearly seven years ago, its returns have kept pace with the S&P 500. It has produced higher than average portfolio income and notably done so even while maintaining a large-cap value lean. This article will explore how DGRO has been able to do it and offer lessons to value and dividend investors alike about what to look for when searching for a core ETF you can hold in both bull and bear markets.
ETF Profile, Methodology
DGRO samples the Morningstar U.S. Dividend Growth Index, which consists of about 400 U.S. securities that pay qualified dividends, have five years of uninterrupted annual dividend growth and have estimated payout ratios less than 75%. It's a dividend dollar-weighted index unique to others that weight based on yield or market capitalization. This method allows it to achieve broad diversification across industries. There is also a nod to the importance of shareholder yield. The index will not exclude companies executing share repurchases even if they fail to raise dividends the previous year.
A key feature of the Index is that it excludes securities yielding in the top 10% of the Morningstar U.S. Market Index. Don't underestimate the value of this screen. As I will show later, this segment of dividend-paying companies averages among the worst-performing U.S. stocks over the last two decades. By getting them out of the way to start, DGRO has a substantial long-term advantage over other ETFs.
The fees are also attractive at only 0.08% annually. Its yield of 2.38% may be considered low for a dividend-focused fund, but it is still almost a whole percentage point higher than S&P
