2023-08-01 01:18:45 ET
Summary
- The iShares Core Dividend Growth ETF aligns with an investment philosophy focused on long-term value creation and compounding returns.
- DGRO holds a diversified portfolio of over 400 individual stocks, with a focus on dividend payers and growers, and a tilt towards large-cap value names.
- Despite underperforming the S&P 500 on a total return basis, DGRO has provided lower volatility and consistent income generation and growth.
In constructing portfolios, I seek out individual stocks and funds that align with my investment philosophy. That is, companies and strategies that focus on long-term value creation while compounding returns over time. The iShares Core Dividend Growth ETF ( DGRO ) allows investors to leverage this investment approach.
Portfolio Characteristics
DGRO holds a diversified portfolio of over 400 individual names spanning market capitalizations and styles. With a focus on dividend payers and growers, the fund tilts toward large-cap value names. The current yield is just under 2.5% and the expense ratio is 0.08%.
The sector allocation slightly overweights defensive areas including staples, healthcare, and utilities while most other areas have an underweight allocation. Two sectors of interest are real estate and technology. The fund maintains zero exposure to the real estate sector while exhibiting a meaningful, yet reasonable overweight, to the technology sector. That said, this is likely a remnant of the reclassification of certain companies between technology, communication services, and consumer discretionary that occurred several years ago. Taken together, the technology and communication services allocations represent a small underweight relative to the breakdown of large-cap value stocks.
In addition to having exposure to mid and small-cap stocks, the top 10 holdings represent about 26% of the fund's value, reinforcing the idea that DGRO provides diversified exposure to quality companies in the U.S.
The value tilt combined with the focus on dividend payers and growers makes this an attractive portfolio holding in the event of an economic slowdown or choppy, sideways-moving equity markets.
Dividend Growth
Over the last 5 years, the dividend paid by DGRO has grown by a compounded annual growth rate of over 10.6%. While the growth rate dipped well below trend during 2021 (but remained positive), it rebounded during 2022 and continued to improve over the last year.
The top fund holdings include numerous dividend aristocrats, those companies that have paid and increased their dividends for decades. Those positions include JPMorgan Chase & Co ( JPM ), Johnson & Johnson ( JNJ ), and Procter & Gamble ( PG ), among others. Apple ( AAPL ) and Microsoft ( MSFT ) are top 5 positions, and despite their bulletproof financial positions, have only been paying a dividend for about 11 years and 20 years, respectively, so not quite true aristocrats.
Recent Performance
DGRO's performance has been in-line with expectations. While it has trailed the S&P 500 on a total return basis over the last year, much of this underperformance is explained by the fund having no position or underweight positions in key high-flying stocks including Meta Platforms ( META ) and NVIDIA ( NVDA ), among others that are not consistent dividend payers/growers. Investors in DGRO have been compensated by this underperformance in part through lower volatility and consistent income generation and growth.
Risk Adjusted Returns
Despite its relatively short history (fund inception was in June 2014), it has shown its ability to reduce portfolio volatility (relative to the S&P 500 and NASDAQ 100) and outperform during sideways markets. Since the S&P's peak at the end of 2021, DGRO has outperformed on a total return basis, albeit slightly. Incorporating return volatility, this difference is clearer.
Over the last 5 years, DGRO has a beta of 0.90 with respect to the S&P 500 TR. During the same period, the fund has captured 89% of the upside and downside of the S&P, far outperforming the risk-adjusted returns of its peers that captured 86% of the upside, but 97% of the downside.
The chart below compares DGRO to U.S. large cap value funds over the last 5 years. The chart illustrates that DGRO has been able to deliver better returns for a slightly lower level of risk as measured by standard deviation of returns.
Portfolio Holdings
As mentioned above, the fund excludes positions in Meta and NVIDIA while underweighting positions in Apple and Microsoft (relative to the S&P 500). While the fund has performed well in absolute terms, it has underperformed relative to major market indexes due to these position weightings. This is a function of the focus on quality dividend payers and growers. While Apple and Microsoft account for about 7.5% and 6.5% of the S&P 500 value respectively, within the DGRO portfolio they are 3.0% and 2.9%. These smaller position allocations mean that there is less concentration in the mega cap tech names that have driven performance in recent years. Admittedly, this headwind is difficult to stomach at times, but is likely partially offset by other positions in investor portfolios.
Risks
Any company-specific risks associated with any of the holdings are mitigated through the diversification that 400+ positions provide. Similarly, the focus on dividends and dividend growth excludes higher risk companies while avoiding over-concentration in a select few as we see in the S&P 500 and NASDAQ 100.
That said, this fund, like all others, is subject to the volatility and uncertainty experienced by financial markets and the broader economy. For equity investors there is no practical way of avoiding those risks while generating sufficient returns to build wealth over time.
Core U.S. Large Cap Value Equity Position
DGRO can be used as a core U.S. Large Cap Value equity holding. Due to the tilt toward value, it likely makes sense for investors to complement this position with one that tilts toward growth and that also has material exposure to mid and small cap. Also, those investors interested in exposure to real estate, either as a core position or a contrarian play on a recovery in commercial (office) will need to acquire that exposure elsewhere.
Final Thoughts
DGRO offers simple, liquid, and diversified exposure to high quality dividend-paying companies. Investing with a repeatable process that protects the time necessary to compound returns over the course of years and decades is a powerful approach for investors seeking long-term success.
In researching other articles and investment ideas/themes, I have been exploring the impact of dividends on long-term total returns. Many might be surprised that over the course of 30+ years, dividends, dividend reinvestment, and dividend growth can contribute 40%+ to total returns. As an example, a 30-year investor in Proctor & Gamble has seen their initial investment increase by about 13x on price appreciation, but by nearly 28x on a total return basis. While it would be easy to suggest simply owning these companies individually, the diversification provided by DGRO and other funds protects investors from the scenario in which the future returns are much different from what occurred in the past.
Thank you for reading. I look forward to seeing your feedback and comments below.
For further details see:
DGRO: Consistent Dividend Growth For Patient Investors