DGRW - DGRW: A Strong Blend Of Capital Appreciation Stability And Dividend Growth

2023-07-11 09:00:00 ET

Summary

• The WisdomTree U.S. Quality Dividend Growth Fund has outperformed popular dividend ETFs and total market funds over the past decade, with returns similar to S&P 500 index funds.
• DGRW focuses on large-cap U.S. companies positioned for growth in their underlying businesses and annual dividends, with a heavy weighting towards technology.
• Despite not generating as large a yield as other dividend ETFs, DGRW's capital appreciation and larger yield than standard index funds make it a successful and popular choice for investors.

I am not invested in any products from WisdomTree , but I came across the WisdomTree U.S. Quality Dividend Growth Fund ( DGRW ) and am very intrigued. This ETF is designed to track the results of large caps in the U.S. that are positioned for growth in both their underlying businesses and the annual dividends paid to shareholders. YTD, DGRW is up 8.95% and has returned 12.44% in the past year, 56.52% in the past 5 years, and 160.89% over the past decade. These are not your typical returns from a dividend fund, as the capital appreciation looks more like an index fund tracking the S&P or the total market. If you’re an income investor looking for a sizeable yield, DGRW won’t be appealing, but if you’re looking for capital appreciation that follows the market with a growing dividend that produces a larger yield than index funds, DGRW will check off the boxes.

DGRW’s returns have outperformed popular dividend ETFs, total market funds and is rivaling S&P 500 index funds over the past decade

Many investors, including myself, think of the Vanguard High Dividend Yield Index Fund ( VYM ) and the Schwab U.S. Dividend Equity ETF ( SCHD ) regarding dividend funds. These have been widely popular ETFs as VYM has amassed $48.18 billion in AUM while SCHD has grown to $47.21 billion in AUM. Over the past decade, DGRW has outperformed VYM by 81.74% and SCHD by 81.74%.

While some would say that’s not necessarily a fair comparison as VYM and SCHD are focused on higher paying dividends, they are still 2 of the largest dividend ETFs in the market, and DGRW has outperformed both of them by a longshot. Turning the focus to total market and S&P 500 index funds, I have selected the Vanguard Total Stock Market Index Fund ( VTI ), and the Vanguard S&P 500 ETF ( VOO ) as they are my favorite ETFs in these categories. Over the past decade, VTI has appreciated by 151.52%, tracking the total market, and VOO has appreciated by 162.5%, tracking the S&P 500. DGRW has outperformed VTI by 9.37% over this period while trailing VOO by -1.61%.

From a performance standpoint, DGRW has been widely successful. While DGRW doesn’t generate as large of a yield as SCHD or VYM, the additional capital appreciation has more than made up for that. DGRW is generating a larger yield than VTI and VOO and has outperformed VTI and produced a similar performance as VOO. It’s hard to dislike DGRW as the short and long-term performance has been favorable, and the yield is larger than standard index funds. I can see why DGRW has amassed $9.24 billion in AUM and continues to be a popular ETF for investors. While past results don’t dictate what will occur, a $10,000 investment in DGRW would have grown to $33,018 over the past decade, an annualized total return of 23.02%. I can’t argue with facts, and DGRW has been a vehicle that has generated strong returns for investors.

After I looked through the fund’s characteristics, I am a strong believer in its future.

The combination of dividend-paying stocks with future growth characteristics is enough to grab and hold my attention. DGRW follows the WisdomTree U.S. Quality Dividend Growth Index , which comprises U.S. dividend-paying companies with a market cap of at least $2 billion. The index has 300 companies in the WisdomTree U.S. Dividend Index with the best-combined rank of growth and quality factors. WisdomTree assesses growth rankings by looking at long-term earnings expectations while assessing quality based on the three-year historical averages for return on equity and return on assets. On the dividend side, DGRW focuses on the aggregate cash dividends each component company is projected to pay based on the most recently declared dividend per share. DGRW focuses on the traditional sectors as index and total market funds, but is heavily weighted toward technology which isn’t normally a high-yielding sector from a dividend perspective. This is one of the main drivers of its outsized capital appreciation.

DGRW has a 0.28% expense ratio and over $9 billion in AUM. DGRW has allocated 96.32% of its assets toward companies with a market cap that exceeds $10 billion, and the remaining 3.68% of assets are invested in companies with market caps between $2-$10 billion. DGRW has been allocating its assets toward the largest dividend growth companies, and unlike other ETFs, DGRW has captured large amounts of capital appreciation by sacrificing around a percentage point of yield. Rather than taking larger positions in higher-yielding large-cap dividend growth companies such as The Coca-Cola Company ( KO ) or Cisco Systems ( CSCO ), DGRW has allocated 15.06% of its portfolio toward Microsoft ( MSFT ) and Apple ( AAPL ). DGRW has allocated 36.11% of its portfolio toward its top ten holds, which include:

1. Microsoft ((MSFT)) 8.88%
2. Apple ((AAPL)) 6.18%
3. Broadcom ( AVGO ) 3.44%
4. Johnson & Johnson ( JNJ ) 3.41%
5. Procter & Gamble ( PG ) 2.8%
6. Home Depot ( HD ) 2.38%
7. Merck & Co. ( MRK ) 2.38%
8. The Coca-Cola Company ((KO)) 2.33%
9. Philip Morris International ( PM ) 2.2%
10. Cisco Systems ((CSCO)) 2.10%

Outside of its top-10 holdings, you will find the following companies:

• PepsiCo ( PEP ) 2.06%
• NVIDIA ( NVDA ) 1.79%
• UnitedHealth Group ( UNH ) 1.74%
• Oracle ( ORCL ) 1.62%

DGRW has a large focus on technology, and while names such as Amazon ( AMZN ), Alphabet ( GOOGL ), and Meta Platforms ( META ) won’t be found within DGRW’s portfolio, it's still invested in several of the largest companies from the S&P 500. Going back to 1957, the S&P 500 index has an average annual return of 8.37%, and if you go back to 1928 and calculate for all of the years that include the largest downturn in the market, the average annual return over the past 96 years has been 7.77%. Over the past 96 years, the market has finished in the red 30 times while finishing positive 65 times, assuming it finishes positive in 2023. This works out to a 31.25% chance of seeing a negative year in the market. There has only been 1 occasion since 1928 (1929-1932) where the market declined for 4 consecutive years. There have been 2 periods (1939-1941) (2000-2002) where the market declined for 3 consecutive years, and only 1 occurrence (1973-1974) where the market declined for 2 consecutive years.

I can’t predict what will occur, but I believe that tech will lead the markets higher over the next several years. Below I constructed a table that includes the number of shares outstanding and what the 2023 and 2025 projected EPS will be for AAPL, MSFT, NVDA, ORCL, AVGO, and CSCO. Then I multiplied these out to indicate what the 2023 and 2025 earnings from operations would look like. Based on the analyst projections , we are projected to see double-digit earnings growth over the next 2 years from DGRW’s largest tech companies. APPL will see a 21.78% projected increase in their earnings from operations, while MSFT will see a 30.50% projected increase.

When I look at what the forward earnings estimates are projected to be, then take into account what the ST. Louis Fed is projecting for interest rates, I believe the markets will appreciate. While the Fed has indicated, we will see 2 more hikes, the St. Louis Fed indicates that rates will decline to 4.6% in 2024 and 3.4% in 2025. As rates come down, I believe it will lead to business expansion as more companies will be willing to borrow as the cost of capital declines. If this occurs, more money will be spent throughout the economy and should increase the earnings power for publicly traded companies. With the way that DGRW is constructed, I think the fund is positioned to benefit and could replicate its performance compared to total market and index funds.

Conclusion

DGRW is an interesting dividend growth fund as the dividend has a 10.22% 5-year average growth rate while producing a yield of 1.91%. DGRW isn’t going after high-yield, and because of this, the fund is able to allocate capital toward companies such as AAPL, MSFT, and NVDA which have helped mimic the performance of traditional total market and S&P 500 index funds. When I look at the underlying portfolio, DGRW is invested in what I would consider the strongest group of dividend companies, as more than 95% of the portfolio is built around companies that exceed a 10 billion market cap. It’s hard to invest in every company we want to, and for investors who are focused on companies growing their dividends, DGRW provides an opportunity to buy the basket and benefit from diversification across different sectors. It’s hard to argue with a 10.22% 5-year average growth rate on the dividend and 160.89% upside appreciation over the past decade. I think DGRW is a buy and is positioned to keep growing its dividend and generating long-term appreciation for shareholders.

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