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The iShares Core Dividend Growth ETF: Here's How It's Kept Pace With The S&P 500


  • DGRO has managed to keep pace with the S&P 500 since its 2014 inception, which is no small feat considering the fund's strong large-cap value lean.
  • This article analyzes how DGRO has been able to behave like an ETF with a 1/3 growth allocation despite it having only a 6% overlap with Morningstar's Large-Cap Growth Index.
  • The answer is in Morningstar's screening criteria, which avoids chasing yield and instead focuses on dividend growth and sustainability.
  • The result is a dividend growth-focused ETF that performs well during bull markets, and could possibly outrun the S&P 500 if the highest-yielding dividend stocks fall out of favor.

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

This article was written by

The Sunday Investor profile picture
Build sustainable portfolio income with premium dividend yields up to 10%.

I perform independent fundamental analysis for over 850 U.S. Equity ETFs and aim to provide you with the most comprehensive ETF coverage on Seeking Alpha. My insights into how ETFs are constructed at the industry level are unique rather than surface-level reviews that’s standard on other investment platforms. My deep-dive articles always include a set of alternative funds, and I am active in the comments section and ready to answer your questions about the ETFs you own or are considering.

My qualifications include a Certificate in Advanced Investment Advice from the Canadian Securities Institute, the completion of all educational requirements for the Chartered Investment Manager (CIM) designation, and a Bachelor of Commerce degree with a major in Accounting. In addition, I passed the CFA Level 1 Exam and am on track to become licensed to advise on options and derivatives in 2023. In November 2021, I became a contributor for the Hoya Capital Income Builder Marketplace Service and manage the "Active Equity ETF Model Portfolio", which as a total return objective. Sign up for a free trial today! Hoya Capital Income Builder.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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