My followers know I advise investors to keep a well-diversified portfolio built for what the market wants to give you, total returns, risk mitigation, and ultimately long-term financial success and security. The recent market rotation likely caught many investors over-weight in growth and technology stocks and underweight sectors like value and dividend growth - which have outperformed of late. In my opinion, the recent market action has supported the general approach of having a well-diversified portfolio. Those underweight the dividend growth sector should take a look at the Wisdom Tree U.S. Quality Dividend Growth Fund ETF (NASDAQ:DGRW). It is a relatively low-cost, diversified and convenient way for investors to allocate capital to the dividend growth sector without having to choose individual stocks. The ETF has more than doubled over the past five years.
Investment Thesis: Portfolio Management
Those familiar with my articles on portfolio management over the past six months or so will likely recognize the sample-portfolio template shown below:
Asset Type | Allocation % |
Cash (CDs, bonds, MM, etc.) | |
Dividend Income | |
Growth | |
Sector Specific ETFs | |
International | |
Precious Metals | |
Speculative Growth |
This portfolio template was made by me and taken from my Seeking Alpha article The Time To Think About Tomorrow Is Today. I have used this template in my articles on portfolio management in order to start a conversation with investors about how to think - at a high level - about how to allocate and manage their investment capital.
Of course, one size does not fit all, and every investor has different personal considerations: age, working/retired, tax bracket, goals, risk/reward comfort level, etc. Yet I suggest the goal should be the same for all investors: to build a well-diversified portfolio wherein you chose the asset types (or categories - the left hand side of the chart) that best fit your needs. After that, it then comes down to deciding on what percentage allocation you want to devote to each of those asset types.
Please note that the template above is just an example, and each investor should feel free to add (or delete) "Asset Types" to tailor his or her needs. The same is true with allocation levels: each investor is likely to have considerably different percentages. In addition, note that investors should not feel pressured to accomplish this portfolio overnight. That is especially the case considering the market's volatility and the fact that it is at or near all-time highs. However, such a template can give you a clear roadmap for where you want to be 2, 3, 5, or 10-years from now. Investing is a journey with long-term success being the destination.
Regardless, many investors will likely end up with a portfolio template that has some allocation to the "Dividend Income" or "Dividend Growth" categories. Those investors should take a look at the DGRW ETF. Here's why.
Top-10 Holdings
The top-10 holdings in the DGRW ETF are shown below and have a relatively moderate concentration of 36.53% of the entire portfolio:
Source: Wisdom Tree DGRW Webpage
As can be seen from the graphic, growth and technology investors will likely have some cross-pollination with DGRW given that Microsoft (MSFT), Apple (AAPL), Intel (INTC), and Cisco Systems (CSCO) equate to roughly 15% of the total fund. If you already have a large position in one or more of these stocks, this is something to consider when choosing your allocation level to DGRW if your goal is to truly construct a well-diversified portfolio.
When it comes to allocation, investors should also consider that DGRW has 26% allocated to IT, and ~16% to both the healthcare and consumer staples sectors. For investors that already have some sector-specific ETFs and/or individual stocks in those sectors, make sure your overall allocation goals are in line with your diversification strategy.
Many might be surprised to find Microsoft to be the #1 holding (with a 5% weighting) in a dividend growth portfolio. Yet as the graphic below shows, MSFT has grown its dividend from $1.44/share in 2016 to the current $2.04/share, while also devoting significant capital to share buybacks:
Source: Microsoft
Note over the past two years, the return of capital emphasis for Microsoft has tilted a bit more toward buybacks as compared to the dividend. Personally, that is not a trend I like seeing, but investors certainly aren't complaining given MSFT's demonstrated total returns over the past few years.
Similarly, the #2 holding - diversified healthcare provider Johnson & Johnson (JNJ), with a 4.5% weight - also has a strong dividend growth history: from $2.11/share in 2010 to $3.98/share in 2020.
Apple, the #3 holding with a 4.5% weight, might also be somewhat of a surprise near the top of a dividend growth portfolio. I say that because the $0.82/share annual dividend is nothing to crow about, nor is the current 0.64% yield. However, consider the graphic below:
Source: Apple
As can be seen, Apple ended its most recent quarter (Q1FY21) with $84 billion in net cash (~$5/share) even though it spent $24 billion on share buybacks and only $3.6 billion on dividends. That being the case, it is clear Apple could easily become a dividend aristocrat if the company chose to do so. Right now, it is clear the company is focused on share buybacks. But again, I doubt investors are complaining given Apple's total returns - including a 4:1 stock split last year.
Income
Much of the rest of the top-10 is more oriented toward yield, for example:
The DGRW ETF pays out a monthly dividend distribution, the last four of which are shown below:
Source: Wisdom Tree DGRW Webpage
As can be seen, the monthly distributions are a bit lumpy because all the companies in the portfolio obviously do not pay their dividends in the same month.
In addition, over the past 12-months note that DGRW hasn't paid out any short- or long-term gains. The point being, almost all of the dividend income from the ETF will be in the tax category "qualified dividends", and thus making the income relatively tax-efficient. That said, for investors holding the ETF in a qualified retirement account (other than a ROTH), the tax status of the ETF's dividends won't make any difference because RMD's (or minimum required distributions) are taxed as "income".
However, I would certainly not characterize this fund as being income oriented despite the words "dividend growth" in the name itself. That's because the TTM yield of the ETF was only 2.59%. Obviously, one could cobble together a few of the ETF's individual top-10 picks - like Verizon, Altria, and Pfizer for instance - and get a yield closer to 5%. That being the case, and as shown in the following section, this ETF is definitely geared more toward total returns - with capital appreciation greatly outperforming the income.
Performance
The five-year returns on an initial $10,000 investment in the DGRW ETF are shown below and equate to an average annual return of 15.3%:
Source: Wisdom Tree DGRW Webpage
Of course, there are many ETFs and funds in the dividend growth space. The graphic below compares the five-year total returns of a couple of them to the DGRW ETF:
Note the iShares Core Dividend Growth ETF (DGRO) has slightly outperformed the DGRW ETF over the past five years, while the Vanguard Dividend Growth Fund Investor Shares (VDIGX) fund has under-performed DGRW by a significant 13%.
Fund Basics
The following metrics come from the Wisdom Tree DGRW Webpage;
- Expense Ratio: 0.28%
- AUM: $5.66 billion
- Country allocation: 100% USA
- Yield: 2.59%
As can be seen, the expense ratio is relatively middle-of-the-road and with $5.66 billion in AUM, there are no concerns with liquidity: it's a large ETF.
Risks
One only has to look at the performance chart shown above to realize this fund is not immune to market turbulence (even though it holds J&J and Pfizer). The current yield is not high enough to support the fund's price during a sell-off. Also, the relatively high allocation to IT means it holds some of the "high-flying" tech stocks.
Summary & Conclusion
For those who want to maintain a well-diversified portfolio, the dividend category deserves some capital allocation. And while the Wisdom Tree DGRW ETF has done well over the past five years, investors should be aware of two things: first, the portfolio has high exposure to the IT and healthcare sectors, with somewhat lower exposure to consumer staples and industrials. I mention that so that investors will be sure to allocate capital accordingly and not get over-exposed due to cross-pollination. Secondly, and as explained earlier, given DGRW's rather middling 2.59% yield, this is not a fund for income.
Yet at the end of the day, many investors either want or need exposure to dividend growth in order to have a well-diversified portfolio. Whether you accomplish that through individual stock holdings or an ETF to get more diversification and increased risk mitigation, that is a personal decision for you to make. If you decide to go the ETF route, the DGRW ETF is certainly a fund to consider. I like it.
