VIG - 4 ETFs For Dividend Growth Investors

2023-06-05 11:15:00 ET

Summary

• All four ETFs have focused on companies that consistently grow their dividend year in and year out.
• Three of the four ETFs discussed have technology as their highest sector exposure and are all positive on the year.
• The author highlights the importance of diversification in investing and the benefits of low-cost ETFs for long-term performance.

When it comes to investing, we always hear that diversification is key, as you never want to put all your eggs in one basket. Diversification not only lowers the risk of losing money, but it also lowers volatility for your portfolio.

A single stock can drop 50% or more in a single day, but that is much more difficult when your investment is made up of 100s or even 1000s of positions.

ETFs come in all shapes and sizes. There are ETFs that track certain sectors or industries, there are ETFs that track specific types of stocks (Growth, Dividend, Market Cap, etc.), and even ETFs for fixed income. There are literally thousands of ETFs out there to choose from.

For me and my portfolio, I love the idea of dividend growth, as it puts the power of compounding into overdrive. When it comes to dividend growth, I am less concerned about yield and more concerned about how fast a company is increasing its dividend. Plus, dividend growth stocks tend to also provide more growth opportunities in terms of the share price. It is all dependent on your level of risk and your investing strategy.

As such, today, I want to discuss four of the best ETFs for those investors looking for dividend growth. All four of these ETFs focus on dividend paying companies, companies that are increasing their dividend on a regular occurrence. We will go through each ETF, starting with the ETF with the slowest five-year dividend growth rate and end with the ETF having the fastest five-year dividend growth rate.

4 of the Best Dividend Growth ETFs

Dividend Growth ETF #1: Vanguard Dividend Appreciation ETF ( VIG )

The Vanguard Dividend Appreciation ETF was founded in 2006 and is managed by the Vanguard Group. The great thing about Vanguard is they tend to have a lot of great ETF offerings and very low costs. High expense fees can eat into total returns over time, and high ETFs tend to underperform over the long term.

VIG has a low expense fee of 0.06%, meaning for every $10,000 invested, you would have an annual fee of $6.

Overall, VIG has $66 billion in assets under management or AUM. Let's take a look at how the assets as a whole have performed over the years.

Looking at this chart below, you can see that over the past 5 years, shares of VIG have gone toe to toe with the S&P 500 returning 65% compared to the S&P 500 returning 68%, with much of the difference happening in the past 3 months.

The ETF is well diversified across many different industries, with the top 5 industries being made up of:

• Technology.
• Financials.
• Health Care.
• Industrials.
• Consumer Defensive.

Those top 5 industries account for 80% of the entire fund.

Now let's look at the top holdings, which will see begins with two technology behemoths in Microsoft ( MSFT ) and Apple ( AAPL ).

The top 10 holdings combine to make up 31% of VIG. In totality, VIG holds 317 total positions.

Now turning our attention to the dividend. VIG has paid out a dividend of $3.03 over the past 12 months and currently yields a dividend of nearly 2%. In terms of dividend growth, VIG, as I mentioned at the start, has the slowest dividend growth over the past five years with an average annual growth rate of nearly 10%. VIG has seen the dividend increase for nine consecutive years.

Dividend Growth ETF #2 - iShares Core Dividend Growth ETF ( DGRO )

The iShares Core Dividend Growth ETF is very similar to VIG in the fact they specifically focus on dividend growth stocks. DGRO is an ETF launched and managed by BlackRock, and the ETF was formed in 2014.

The ETF has $22.7 billion in AUM and a low expense ratio of 0.08%, meaning for every $10,000 invested, you would have an annual fee of only $8, making it another low-cost ETF.

Over the past five years, DGRO has underperformed the S&P 500 by about 8%.

The ETF is well diversified across many different industries. The top 5 industries include:

• Health Care.
• Financials.
• Technology.
• Consumer Defensive.
• Industrials.

Those top 5 industries account for nearly 76% of the fund.

Now let's look at the top holdings, which again include MSFT and AAPL at the top of the list, similar to VIG.

These top 10 holdings account for 27% of DGRO and in totality, the ETF holds 449 positions.

In terms of the dividend, DGRO shareholders have earned a dividend of $1.20 over the past 12 months, which equates to a dividend yield of 2.43%. Over the past five years, investors have enjoyed an average annual dividend increase of 10.3% and the dividend has increased for eight consecutive years.

Dividend Growth ETF #3 - WisdomTree Quality Dividend Growth ETF ( DGRW )

The WisdomTree Quality Dividend Growth ETF is a fund I have really started to like over the past year, as it has provided a good mix of share price appreciation as well as strong dividend growth.

DGRW was launched by WisdomTree, to which they co-manage the fund with Mellon Investments. The ETF recently crossed its 10yr anniversary since its launch.

DGRW has $8.6 billion in AUM with an expense ratio of 0.28%, which is the highest on the list today.

Over the past five years, DGRW has OUTPERFORMED the S&P 500, albeit slightly, but that is largely due to their high technology exposure.

Looking at the chart below, you can see the ETF is very much exposed to the Technology sector, which makes up 30% of the entire portfolio. The next 4 largest sector weightings include:

• Consumer Defensive.
• Industrials.
• Health Care.
• And Financials.

The technology sector has been the largest weighting in all three ETFs we have looked at so far, but DGRW far and away has the largest exposure to the Technology sector. The top five industries account for 86% of the fund, making DGRW much more sector focused than either VIG or DGRO.

Now let's look at the top holdings, which to no surprise yet again includes the likes of MSFT and AAPL manning the top two positions.

These top 10 holdings account for 36% of DGRW, and in totality, the ETF holds an interest in 298 positions.

DGRW has paid out a dividend of $1.32 over the past 12 months and currently yields a dividend of 2.1%. Over the past five years, investors have enjoyed an average annual dividend increase of 12.3%.

Dividend Growth ETF #4 - Schwab US Dividend Equity ETF ( SCHD )

Last, but certainly not least, is the Schwab US Dividend Equity ETF, which has quickly become one of the favorites among the dividend investing community. The fund is certainly a favorite of mine.

From an investor standpoint, the ETF checks off a lot of boxes:

• Solid Performance.
• Solid Dividend Yield.
• Strong Dividend Growth.

Over the past five years, SCHD has gone toe to toe with the S&P 500 by returning nearly 70% over that timeframe.

The ETF is well diversified across many different industries. The top 5 industries include:

• Industrials.
• Health Care.
• Financials.
• Consumer Defensive.
• Technology.

The top 5 industries account for nearly 75% of the fund, with the Technology sector coming in fifth, which is a major reason as to why SCHD has underperformed the S&P 500 in 2023.

Now let's look at the top holdings, which includes a technology company at the top in Broadcom ( AVGO ), but AAPL and MSFT is not found in the top 10.:

The top 10 holdings account for 42% of SCHD and in total, SCHD holds 104 positions.

SCHD has paid out a dividend of $2.64 over the past 12 months, which yields a dividend of 3.75% for SCHD. That is a pretty solid yield and the highest among the group today. However, not only does SCHD have the highest dividend yield, but they also have the fastest five-year dividend growth rate of 15.5%. SCHD has seen their dividend increase for 10 consecutive years.

Investor Takeaway

If you are looking for dividend growth, you would be hard-pressed to find a better list than the four ETFs we visited today:

1. Vanguard Dividend Appreciation ETF ( VIG ).
2. iShares Core Dividend Growth ETF ( DGRO ).
3. WisdomTree Quality Dividend Growth ETF ( DGRW ).
4. Schwab US Dividend Equity ETF ( SCHD ).

SCHD has been among the top performers over the past five years, but is the only ETF on the list in the red in 2023, which is due to their lower exposure to the technology sector. The other three ETFs are positive on the year, and technology is the leading sector in all three of those ETFs. DGRW is the best-performing ETF on the list thus far in 2023.

In the COMMENTS SECTION below, let me know which of these four ETFs you like best for the next 5-10 years.

Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.

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