2023-06-28 05:11:56 ET
Summary
- Dividend growth ETFs offer investors outstanding dividend growth, but relatively low starting yields.
- DGRO is one of the largest dividend growth ETFs in the market.
- An overview of the fund follows.
The iShares Core Dividend Growth ETF ( DGRO ) is one of the largest dividend ETFs in the market today, with over $23.3 billion in AUMs. DGRO offers investors an above-average 2.4% dividend yield and dividend growth track-record, as well as a comparatively cheap valuation. The fund is a buy, but seems to track the S&P 500 quite closely, so substantial outperformance seems incredibly unlikely.
DGRO Basics
- Investment Manager: BlackRock
- Dividend Yield: 2.44%
- Expense Ratio: 0.08%
- Underlying Index: Morningstar US Dividend Growth Index
- Total Returns 5Y CAGR: 10.71%
DGRO - Overview and Analysis
Index and Holdings
DGRO is a U.S. equity ETF, tracking the Morningstar US Dividend Growth Index. It is a relatively simple index, including all relevant U.S. equities with at least five years of uninterrupted dividend growth, positive EPS, and payout ratio lower than 75%. Said index also excludes the companies with the highest 10% dividend yields, in an attempt to limit risk and investments in yield-traps. It only includes companies with qualified dividends, so no MLPs, REITs, or other niche securities. DGRO's investment process is as follows:
DGRO's underlying index is quite broad, which results in a well-diversified fund, with investments in 427 companies, and with exposure to most relevant industry segments. The fund's largest holdings are all well-known U.S. blue-chips, including Microsoft ( MSFT ), Johnson & Johnson ( JNJ ), and AbbVie ( ABBV ). These are as follows:
Industry weights are as follows:
Relative to the S&P 500, DGRO is overweight old-economy industries like financials, health, and utilities, as companies in these industries tend to have long, consistent track-records of dividend growth. On the flipside, the fund is underweight tech and communications, as companies in these industries rarely have such track-records. Compare DGRO's industry exposures to those of the S&P 500.
Due to the above, DGRO's relative performance is somewhat dependent on the relative performance of the above industries, especially tech. DGRO tends to underperform the S&P 500 when tech outperforms, as was the case in 2020.
Data by YCharts
At the same time, the fund tends to outperform the S&P 500 when tech underperforms, as was the case in 2022.
Data by YCharts
Most dividend ETFs have similar industry exposures as DGRO, although some hew more closely to the S&P 500 than others. From what I've seen, DGRO tends to perform much more similar to said index than many other dividend ETFs. As an example, look at how closely DRGO's returns hew to those of the S&P 500 versus those of the Vanguard High Dividend Yield Index Fund ( VYM ):
Data by YCharts
In my opinion, DGRO's industry exposures, and the impact these have on the fund's performance, are neither positives nor negatives, but they are important facts for investors to consider.
Dividends and Dividend Growth Analysis
DGRO's dividend growth track-record is quite strong, as the fund exclusively invests in companies with long track-records of consistent dividend growth. Dividends tend to grow at a double-digit annual rate, with some volatility. Growth has been particularly strong these past twelve months, at least in part because of favorable comps.
DGRO's dividend growth is stronger than that of the S&P 500, but broadly comparable to that of most dividend growth ETFs, including the Vanguard Dividend Appreciation Index Fund (VIG). It is, however, somewhat weaker than that of the Schwab U.S. Dividend Equity ETF ( SCHD ), one of the most popular, better-performing dividend ETFs in the market.
Seeking Alpha - Chart by Author
DGRO does not focus on companies with strong or above-average dividend yields, only on those with strong growth, it only yields 2.4%, a relatively lackluster yield. As dividend growth is somewhat correlated with yields, if only because companies with no dividends have no dividend growth, the fund's yield is a bit higher than that of most U.S. equity indexes, with the S&P 500 sporting a 1.5% yield. It is not a particularly attractive yield relative to other dividend ETFs, however.
Seeking Alpha - Chart by Author
As DGRO's starting dividend yield is quite low, the fund's yield on cost is low too, even though the fund's dividends grow quite rapidly. It took investors five years for the fund's yield on cost to reach 3.0%, 8 years for it to reach 4.0%. Yields remain anemic for even long-term investors, although at least the growth is quite consistent.
DGRO's yield on cost looks fine relative to broader equity indexes and most U.S. dividend ETFs. It does, however, compare unfavorably to that of SCHD.
Seeking Alpha - Chart by Author
DGRO's dividends are, overall, somewhat stronger than average, benefitting the fund and its investors. At the same time, said benefits seem quite small, as the fund's starting 2.4% dividend yield is quite low.
DGRO does compare unfavorably to SCHD on most relevant dividend metrics right now / in the past, but that might not necessarily be the case moving forward. DGRO has seen much, much stronger dividend growth these past twelve months, for instance. Perhaps the next twelve months will be strong as well.
Performance Track-Record
DGRO's overall performance track-record is about average, with the fund generally closely tracking the performance of the S&P 500. The long-term chart is striking.
Data by YCharts
DGRO's returns are also heavily correlated, quantitatively, to those of the S&P 500. Correlations are somewhat higher than average, but equivalent to those of VIG.
DGRO's close correlation to that of the S&P 500 is due to the fact that the fund is quite broad, with very lax inclusion and exclusion criteria. Due to this, the fund is quite similar to the well-known index, hence their very similar performances.
Considering the above, it seems clear that DGRO should perform (roughly) in-line with the S&P 500 from here on out, long-term. Investors might get a year or two of outperformance, but I would not significantly differences in performance, especially long-term.
Valuation
DGRO sports a relatively cheap valuation, with a PE ratio of 16.8x, and a PB ratio of 3.2x.
For reference, the S&P 500 sports a PE ratio of 21.8x, and a PB ratio of 4.1x. Both figures are higher than those of DGRO.
As DGRO is overweight value stocks and industries, including financials, and underweight growth, including tech, the fund should sport a cheap valuation. As per JPMorgan ( JPM ), U.S. large-cap value stocks, closest analogue to DGRO, are currently 3.1% overvalued relative to their historical averages. Gains seem unlikely, although, at the very least, overvaluation is lower than that of the average U.S. large-cap, at 14.8%.
JPMorgan Guide to the Markets
In my opinion, and considering the above, DGRO's valuation compares favorably to that of the S&P 500, and is a small benefit for the fund and its shareholders.
Conclusion
DGRO offers investors an above-average 2.4% dividend yield and dividend growth track-record, as well as a comparatively cheap valuation. The fund is a buy, but seems to track the S&P 500 quite closely, so substantial outperformance seems incredibly unlikely.
For further details see:
DGRO: Good Dividend Growth ETF, Lackluster 2.4% Yield