2023-06-23 02:48:33 ET
Summary
- iShares Core Dividend Growth ETF is suitable for long-term investors seeking capital appreciation and dividend income, with a consistent dividend growth rate of over 10%.
- DGRO's dividend growth outperforms the current inflationary environment, making it an attractive option for investors who will rely on dividend income in the future.
- The fund has a high exposure to defensive sectors, providing stability in uncertain macroeconomic conditions.
ETF Overview
Back in 2020, we wrote an article on iShares Core Dividend Growth ETF ( DGRO ). In that article, we highlighted that its top holdings are quality stocks that should be able to continue to pay their dividends in the foreseeable future. However, at that time, these stocks were trading at slightly expensive valuation and hence we did not recommend a buy. However, many things have changed in the past 3 years, and we will analyze the fund again to provide our analysis on DGRO in this inflationary environment.
ETF Overview
DGRO seeks to track the investment results of the Morningstar U.S. Dividend Growth Index. The fund focuses on dividend stocks that has 5 or more consecutive years of dividend growth with payout ratios below 75%. DGRO has a high exposure to defensive sectors, which is a good characteristic to have in this uncertain macroeconomic environment. The fund has consistently grown its dividend by over 10% in the past and should continue to grow its dividend in the future. This dividend growth rate is even better than the peak inflation rate reached in mid-2022. Although its current dividend yield is low, we anticipate the fund to continue to grow its dividend at a fast pace in the future. Hence, this fund is perfect for patient investors who may not need this income right now but will eventually need it several years away from now.
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Fund Analysis
This is not a fund for investors seeking purely dividend income
DGRO is not the fund for investors wishing to earn attractive dividends. In fact, its dividend yield of 2.4% is not very attractive. This is only 90 basis points slightly higher than S&P 500's 1.5% but below the 10-year treasury's 3.7% yield.
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This fund is more suitable for investors with a long-term investment horizon seeking to earn both capital appreciation and some dividend income. Its capital appreciation is quite impressive over the long run. As can be seen from the chart below, DGRO delivered a return (excluding dividends) of 106.1% since its inception in 2014. This was much higher than the 58.6% return of Vanguard High Dividend Yield ETF ( VYM ) which has an emphasis on dividend yield in its portfolio selection. DGRO's return was only slightly inferior than the S&P 500's 122.6% in the same period.
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DGRO's dividend growth beats the current inflationary environment
However, if your goal is to earn some dividend income that will beat this current inflationary environment, DGRO is the fund to go. As can be seen from the chart below, the fund's dividend growth has been quite stable at about 10.5%. This is still better than the peak of the inflation set in mid-2022. As inflation gradually falls back down, DGRO's dividend growth will look even more attractive.
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Although its current dividend yield of 2.4% is not particularly attractive, if we look at the yield based on the initial cost, the yield is actually quite good depending on when one bought this fund. For example, if one bought DGRO back in the beginning of 2016, when the fund price was trading at $24.28 per unit, the yield might not be very impressive at that time, but over the past 7 years, its quarterly dividend has grown from $0.158 per unit to $0.26 per unit today. This represented a growth rate of 64.6%. The yield based on this investor's initial cost of $24.28 is now 4.1%. This is quite attractive. If it continues to grow at a pace of 10.5% annually, the yield based on its initial cost will become 6.6% in 5 years. Therefore, this is a good fund for investors who may not need much dividend income now, but will need to rely on dividend income 10 years from now. Its impressive dividend growth record in the past should give investors peace of mind especially in this inflationary environment.
DGRO has a high exposure to defensive sectors
DGRO also has a high exposure to defensive sectors. As can be seen from the table below, health care, consumer staples, and utilities sectors represent 19.25%, 10.59%, and 6.62% of DGRO's total portfolio. Together, they represent about 36.5% of DGRO's total portfolio. This exposure is higher than the S&P 500's 23.3%. This exposure should also give investors peace of mind as we may not be far from a recession due to the Federal Reserve's tightening monetary policy to combat inflation.
Investor Takeaway
DGRO has a portfolio of dividend growth stocks that should continue to grow their dividends in the future. For investors who do not need to rely on its dividend income right now but will eventually need this income many years from now, this fund is a good one to own as it has strong dividend growth potential. Therefore, we recommend investors with a long-term investment horizon to own this fund.
For further details see:
DGRO: A Buy For Long-Term Income Objective (Rating Upgrade)