Summary
- Bolstered by rising inflation, many investors have once again returned dividend stocks to generate cash flow from their investments as they wait out market turbulence.
- The iShares Core Dividend Growth ETF certainly fits the bill, it is an exchange-traded fund offered by BlackRock that enables investors to gain exposure to a wide portfolio of dividend-growth stocks.
- The fund itself is governed by a rather straightforward philosophy: investing in stocks that have a history of consistently rising dividends and pay out no more than 75% of earnings.
- With the exception of the energy and banking stocks, all DGRO's top 10 holdings generated an average 3yr ROIC of over 10%.
Introduction
Bolstered by rising inflation, many investors have once again returned dividend stocks to generate cash flow from their investments as they wait out market turbulence.
The iShares Core Dividend Growth ETF ( DGRO ) certainly fits the bill. It is an exchange-traded fund ("ETF") offered by BlackRock ( BLK ) that enables investors to gain exposure to a wide portfolio of dividend-growth stocks for a reasonable price tag.
The fund itself is governed by a rather straightforward philosophy: investing in stocks that have a history of consistently rising dividends and pay out no more than 75% of earnings.
Since it was launched, DGRO has marginally outperformed the S&P 500 (SP500), besting the broad market fund by roughly 10% in total. Sustained outperformance against the S&P signals to me that an investment strategy may have legs.
With an expense ratio of just 8 basis points, I would classify this fund as "dirt cheap."
Let's explore some of the fund's holdings in greater detail to see how they stack up on a variety of financial metrics.
DGRO Holdings
The fund itself has a total of 448 different holdings, though 26% of those holdings are concentrated in the top 10. Compared to other funds, I am comfortable with this level of concentration. For comparison's sake, the S&P 500 also has close to 30% of its holdings concentrated in the top 10.
Ticker | Name | Sector | Weight (%) |
( XOM ) | Exxon Mobil Corp. | Energy | 3.23 |
( JPM ) | JPMorgan Chase & Co. | Financials | 3.06 |
( AAPL ) | Apple Inc. | Information Technology | 2.97 |
( MSFT ) | Microsoft Corp. | Information Technology | 2.95 |
( JNJ ) | Johnson & Johnson | Health Care | 2.82 |
( CVX ) | Chevron Corp. | Energy | 2.68 |
( ABBV ) | AbbVie Inc. | Health Care | 2.24 |
( PG ) | Procter & Gamble | Consumer Staples | 2.05 |
( PFE ) | Pfizer Inc. | Health Care | 2.01 |
( HD ) | Home Depot, Inc. | Consumer Discretionary | 1.92 |
Revenue Growth
Looking first at revenue growth per share, a few things stand out to me. First, the mega-cap techs have blown it out of the water, especially Apple! On a per-share basis, Apple grew revenue per share by 278% over the last decade. Interestingly, Microsoft and AbbVie grew per share revenues at a similar clip.
But, as you can see in the chart above, a major part of AbbVie's growth was driven by buybacks, whereas Microsoft relied more heavily on simple standard revenue growth.
Cash Flow Growth
Operating cash flow growth has shown a similar trend over the last decade. Apple is once again at the top of the list, with a growth rate of 259%! And AbbVie and Microsoft are not far behind at 242% and 223%, respectively.
You'll notice that there is some choppiness in JPMorgan's CFO growth. This is due to the fundamental nature of operations in the banking industry, cash flow can be incredibly choppy quarter to quarter, year to year, and even decade to decade.
All in all, 6 of the top 10 companies increased their CFO per share by more than double within a single decade. I'll take that all day, every day.
Return on Invested Capital
Returns on invested capital have been, by in large, quite strong among this fund's top 10 holdings. With the exception of the energy and banking stocks, all the top 10 holdings generated an average 3yr ROIC of over 10%. Some companies, like Home Depot and Apple, have generated over 40%! Impressive stuff.
Using the average stock market return of 10% per annum as a barometer, I'd be quite satisfied if I had let these companies manage some of my own money!
Dividend Yield
This fund does employ a high dividend yield strategy. Apple, one of this fund's largest holdings, yields less than 1%, and not a single holding yields greater than 4%. To me, this is not a negative, but investors should be aware that they are buying into companies that are growing their dividends, not just the companies with a dividend that is high right now.
Performance vs Peers
Over the selected time period, compared to other dividend growth-focused ETFs, DGRO wound up on top in terms of total return. Though this feat is a relatively marginal win, as Vanguard's dividend growth mutual fund ( VDIGX ) was not far behind at 145%.
Conclusion
iShares' dividend growth fund iShares Core Dividend Growth ETF checks all the boxes for me, it's market-beating, diversified, and comes at a cheap price. It's supported by a large set of companies with relatively strong fundamentals. Investors could do much worse than investing in this ETF.
I'm rating the iShares Core Dividend Growth ETF a buy.
For further details see:
DGRO: Dividend Growth At A Fair Price