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Fast facts about iShares Core Dividend Growth ETF
iShares Core Dividend Growth ETF (NYSEARCA:DGRO) started investing operations on 6/10/2014 and tracks the Morningstar® US Dividend Growth Index, which is composed of “U.S. equities with a history of consistently growing dividends”. The fund’s issuer, iShares, is a part of BlackRock (BLK). DGRO has a cheap expense ratio of 0.08% and a 30-day SEC yield of 2.28%. It is a large fund with over $30 billion in assets under management and an average daily dollar trading volume of $128 million.
Strategy
As described by Morningstar, eligible stocks must be in the Morningstar US Market Index (parent index), and:
- Not be a REIT (real estate investment trust).
- Not have a dividend in the top 10% of the ex-REIT parent index.
- Have a positive earnings forecast and a payout ratio forecast below 75% (calculated as the forward 12-month indicated dividend per share divided by the forward 12-month consensus earnings per share).
- Have at least five years of uninterrupted annual dividend growth.
Nonetheless, a company may stay in the index with an unchanged dividend from the previous year if it has repurchased shares in the previous 12 months (“buyback”).
The index is weighted based on total dividends expected to be paid over the next 12 months, with a 3% cap. It means large companies paying a large amount of total dividends with a lower yield are favored over small companies with a higher yield. The index is reconstituted annually in December and rebalanced quarterly. During the most recent fiscal year, the fund’s portfolio turnover rate was 25%.
In summary:
The strategy is aimed at companies that not only have a history of growing their dividends, but also are likely to grow them in the future.
Portfolio
DGRO has 408 holdings as of writing, almost exclusively U.S. companies (99% of asset value), with about 76% in large and mega caps, 20% in mid-caps and 4% in small and micro-caps (based on Fidelity classification). This article will use the Russell 3000 Index as a benchmark, represented by iShares Russell 3000 ETF (IWV), which has a similar size profile.
The portfolio has a focus on financials (22%) and significant exposure to technology (17.5%), healthcare (15.8%), consumer staples (11.5%) and industrials (11%). Other sectors weigh no more than 7% individually and 22% in aggregate. Compared to the Russell 3000, DGRO significantly overweights financials, healthcare, consumer staples and utilities, while it downplays technology, communication and consumer discretionary. It ignores real estate by definition.
The portfolio is well-diversified and risks related to individual companies are low to moderate, thanks to the 3% capping rule applied at each rebalancing. The current top 10 holdings, listed in the next table, represent 26.6% of asset value, and the heaviest position (Microsoft) weighs 3.4%.
Ticker | Name | Weight (%) | Sector |
MICROSOFT CORP | 3.37 | Information Technology | |
JPMORGAN CHASE & CO | 3.14 | Financials | |
APPLE INC | 2.87 | Information Technology | |
EXXON MOBIL CORP | 2.85 | Energy | |
JOHNSON & JOHNSON | 2.73 | Health Care | |
BROADCOM INC | 2.66 | Information Technology | |
ABBVIE INC | 2.54 | Health Care | |
CME GROUP INC CLASS A | 2.17 | Financials | |
PROCTER & GAMBLE | 2.16 | Consumer Staples | |
HOME DEPOT INC | 2.11 | Consumer Discretionary |
Source: iShares
Fundamentals
DGRO is classified by Morningstar in the “Large Value” category, which is confirmed by the next table. Indeed, the fund is cheaper than the benchmark based on valuation ratios and has lower aggregate growth rates.
DGRO | IWV | |
Price / Earnings TTM | 21.03 | 24.04 |
Price / Book | 3.45 | 4.02 |
Price / Sales | 2.42 | 2.66 |
Price / Cash Flow | 14.89 | 16.6 |
Earnings growth | 4.08% | 12.31% |
Sales growth | 5.97% | 7.14% |
Cash flow growth | 2.34% | 6.17% |
Source: Fidelity
Historical performance
DGRO has underperformed IWV by 47 bps (basis points) in annualized return since 6/16/2014. Nonetheless, DGRO shows a marginally better risk-adjusted performance (Sharpe ratio in the next table).
From 6/16/14 | Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility |
DGRO | 215.56% | 11.13% | -35.10% | 0.68 | 14.10% |
IWV | 230.38% | 11.60% | -35.22% | 0.65 | 15.50% |
Data and calculation: Portfolio123
The annual sum of distributions has increased by 113.8% between 2015 and 2024, from $0.65 to $1.39 per share. This 9-year dividend growth rate has greatly outpaced cumulative inflation, about 33% in the same time based on the Consumer Price Index. Additionally, the next chart shows that this growth was quite steady, pointing to a successful dividend growth strategy.
DGRO distribution history (Seeking Alpha)
DGRO ETF Vs. Other Popular Growth ETFs
The next chart and table compare characteristics of DGRO and five of the most popular dividend growth ETFs, with a focus on large U.S. companies:
- Vanguard Dividend Appreciation Index Fund (VIG)
- WisdomTree US Quality Dividend Growth Fund (DGRW)
- First Trust Rising Dividend Achievers ETF (RDVY)
- ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
- Rowe Price Dividend Growth ETF (TDVG)
Sector breakdowns, with sectors ranked based on DGRO composition (Chart: author; data: the ETF issuers)
DGRO is quite heavy in financials compared to its peers. Only DGRW, and to a lesser extent VIG, have heavier weights in this sector. DGRO comes first for exposure in utilities, second in healthcare (behind VIG) and is in last position for industrials (again shortly behind VIG).
DGRO | VIG | DGRW | RDVY | NOBL | TDVG | |
Inception | 06/10/2014 | 04/21/2006 | 05/22/2013 | 01/06/2014 | 10/09/2013 | 08/04/2020 |
Expense Ratio | 0.08% | 0.05% | 0.28% | 0.48% | 0.35% | 0.50% |
AUM | $30.41B | $102.29B | $14.70B | $13.64B | $11.45B | $794.31M |
Avg Daily Volume | $128.27M | $250.77M | $56.47M | $68.26M | $89.45M | $2.73M |
Holdings | 408 | 341 | 303 | 78 | 71 | 100 |
Top 10 | 26.60% | 31.05% | 36.89% | 22.83% | 15.44% | 26.73% |
Turnover | 25.00% | 11.00% | 25.00% | 57.00% | 21.00% | 14.00% |
Yield TTM | 2.28% | 1.84% | 1.58% | 1.72% | 2.15% | 1.05% |
Div. Growth 3 Yr CAGR | 8.94% | 7.69% | 3.03% | 20.30% | 4.97% | 12.74% |
Tot. Return* | 71.77% | 69.74% | 79.13% | 98.67% | 53.59% | 67.93% |
Annual.Return* | 12.06% | 11.78% | 13.06% | 15.55% | 9.45% | 11.53% |
Drawdown* | -19.31% | -20.39% | -17.27% | -25.32% | -17.92% | -19.20% |
Sharpe ratio* | 0.58 | 0.56 | 0.63 | 0.61 | 0.41 | 0.57 |
Volatility* | 14.89% | 14.63% | 14.60% | 20.13% | 16.23% | 14.73% |
*from 8/4/2020 to match all inception dates, calculated with Portfolio123. Other data from Seeking Alpha.
DGRO has the highest yield on this list and is ranked second behind VIG for assets under management, liquidity in dollar volume, and expense ratio. It is not among the best for the 3-year dividend growth, but the best performers in this matter (RDVY and TDVG) don’t show a steady dividend growth trend. It is third behind RDVY and DGRW for total return and Sharpe ratio since 8/4/2020. However, DGRO is ahead of RDVY in Sharpe ratio since 2014, due to the latter’s higher volatility (reported in the next table). Moreover, DGRO is more diversified than DGRW, whose top 10 holdings weigh about 36%, with the heaviest position over 7%.
From 6/16/14 | Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility |
DGRO | 215.56% | 11.13% | -35.10% | 0.68 | 14.10% |
DGRW | 242.31% | 11.97% | -32.04% | 0.73 | 14.17% |
RDVY | 240.29% | 11.91% | -40.60% | 0.59 | 18.64% |
Who should consider DGRO?
DGRO is primarily designed to be a core holding for long-term investors seeking a growing income stream outpacing inflation. DGRO is a much safer long-term income source than high-yield ETFs. The higher the yield, the higher the risk. High-yield ETFs are often more volatile. Moreover, some of them suffer steady capital decay, meaning the distribution per share is not sustainable in the long term. DGRO offers less impressive, but growing distributions.
Additionally, dividend growth ETFs like DGRO are generally less volatile than stock benchmarks, making them interesting for risk-averse investors with an objective of total return.
Takeaway
iShares Core Dividend Growth ETF has a diversified portfolio of over 400 U.S. stocks with a 5-year history of uninterrupted dividend growth, targeting investors seeking a growing income stream. DGRO has value characteristics and a focus on financials. Since its inception, DGRO has marginally underperformed the Russell 3000 benchmark in annualized return, but outperformed it in Sharpe ratio. Compared to competitors, DGRO may be challenged by DGRW, but has a steadier dividend growth trend, lower fees and a more diversified portfolio.
Pros: Low expense ratio, risk-adjusted performance above the benchmark, steady dividend growth, yield above competitors, low risk related to individual companies.
Cons: Risk related to the financial sector, lags DGRW.
This article answers these three main questions about DGRO:
- What is the main purpose of DGRO?
- What type of investor is DGRO best suited for?
- How does DGRO compare to other dividend growth ETFs?
Editor's note: This article is intended to provide a general overview of the ETF for education purposes only and, unlike other articles on Seeking Alpha, does not offer an investment opinion about the ETF.
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