2023-06-29 11:45:28 ET
Summary
- In this article, I compare two popular dividend growth ETFs: iShares’ Core Dividend Growth ETF and Schwab’s US Dividend Equity ETF.
- While SCHD has a higher dividend yield and has shown more dividend growth, DGRO has outperformed SCHD in terms of overall performance since 2015.
- The choice between the two funds depends on the individual investor's goals, with SCHD being a good option for those requiring current income, while DGRO offers similar total returns while distributing less capital to shareholders.
Introduction
Who doesn’t like watching their dividends come in? It’s a check that comes to us investors for performing the "feat" of holding a stock in an account and doing nothing. What’s more, is that the check is recurring, and usually grows over time.
That is hard to beat.
But investors have many places where they can stash their money to receive dividends, in fact, there are thousands of stocks to choose from in the US alone, and beyond that there are many dividend-focused mutual funds and ETFs.
To help narrow down the decision-making process, in this article, I will compare two popular dividend growth ETFs, iShares' Core Dividend Growth ETF ( DGRO ) and Schwab's U.S. Dividend Equity ETF ( SCHD ) by focusing on the essentials. I will analyze the holdings, sector allocation, dividend yield, dividend growth rate, expense ratio, and historical performance. By examining these factors, investors can gain valuable insights to evaluate and select the most suitable dividend growth ETF for their portfolio.
Without further ado, let’s start the analysis.
Holdings
Personally, whenever I am considering making an investment in an ETF, the first place I immediately gravitate towards is the holdings section. After all, an ETF is merely a wrapper that holds a basket of investments.
From the start, some big differences begin to emerge in the strategies between these two ETFs, especially in terms of concentration. Schwab’s offering has just around 100 total holdings, with upwards of 40% of the portfolio concentrated in just 10 holdings, whereas the iShares fund holds over 400 companies, and the top 10 companies make up just ~27% of the portfolio.
Let’s take a look at the top 10 holdings within these funds (especially important for Schwab given the concentration).
Schwab
iShares
Despite sharing a similar dividend-centric focus, these funds hold very different companies with a totally different approach to concentration. The iShares fund’s holdings are loaded with mega caps stocks like Apple ( AAPL ), and Microsoft ( MSFT ), the sort of thing you might expect to see in an S&P fund, not a dividend-focused fund.
Schwab on the other hand took a different approach for their portfolio construction, opting instead for high-yielders and concentrating heavily on those positions. Among the top 10 holdings, the only shared holdings are AbbVie ( ABBV ), and Pfizer ( PFE ).
While the difference in concentration is somewhat surprising, it's intuitive to me that there would be differences between the companies held due to their different strategies.
Whereas the Schwab fund is looking to provide a mixture of quality, and high yield today, the iShares fund is more focused on future dividend growth, which leads to a portfolio that yields less today but with a (theoretically) greater potential for growth in the future.
Sector Exposure
The differences between the strategies of these funds are further revealed by comparing the exposures they have to the various market sectors. While both companies have high exposure to Health Care and Financials, iShares DGRO has much more exposure to Technology and Utilities while Schwab’s SCHD leans heavily toward Industrials and Consumer Staples.
Given how many Utility companies pay dividends I found it quite surprising how little exposure SCHD had to that sector, I would have actually expected SCHD to have more exposure there compared to DGRO.
One similarity these funds shared was their minimal exposure to the communications sector, again not surprising as some of the largest companies in that space do not pay dividends (Alphabet ( GOOG ) (GOOGL) and Meta ( META )).
Dividend Yield and Dividend Growth
Unsurprisingly, Schwabs SCHD's dividend yield of 3.64% is greater than DGRO's 2.43% due to its increased exposure to those higher-yielding names.
What does shock me, though, is that despite “Dividend Growth” being in its name, DGRO actually underperforms in dividend growth compared to SCHD when using the overall dividends paid in 2015 as a benchmark to compare the two funds.
As you can see in the chart above, since 2015 both funds have seen increased distributions, but SCHD’s dividends have grown 40% more than DGRO’s in the same time period.
While this is interesting, it's difficult to compare the dividend growth of funds because their holdings are subject to change over time. Rebalancing can have a big impact on the fund's distributions.
Because of that, let's see how each of the fund's top 3 holdings compare to each other in terms of dividend growth, so we can get a better idea of dividend growth irrespective of portfolio rebalancing.
As you can see in the chart above, with the notable exception of Microsoft, SCHD's top holdings grew their dividends much faster than DGRO. Johnson and Johnson ( JNJ ) has been a notable laggard, having only increased its distribution by roughly 80% over the past decade.
EPS Growth
But dividend growth doesn't tell the entire story.
It's important to factor in earnings growth as well, and this is where DGRO begins to look more competitive. Sure, of these companies, the fastest growing was SCHD's Texas Instruments ( TXN ) but two of DGRO's companies grew their earnings by upwards of 250%. This goes to show that DGRO's meager dividend growth may have more to do with management not growing the dividend on pace with earnings growth.
Payout Ratios
The payout ratios seem to confirm my thesis, on average DGROs holdings are paying out less of their earnings as dividends to shareholders compared to SCHD. Despite the dividend growth, Apple and Microsoft's payout ratios have actually declined over time.
Performance and Expenses
Yes, it has slower dividend growth and lower yield, but DGRO has managed to outperform SCHD since 2015 which shows that dividends aren't everything.
DGRO's greater exposure to Tech stocks clearly benefited them in 2020 and the first half of 2023 just as SCHD's increased exposure to industrials helped its performance in 2022 when those were outperforming.
DGRO has indeed outperformed SCHD, but it's only by a small margin, I'd hardly make my decision on where to invest based on a small 4% difference across nearly a decade.
Similarly, I wouldn't make my investment decision based on their expense ratios either, DGRO's ER of 0.08% is only a small fraction away from SCHDs 0.06%. Both are at or near the bottom of expense ratios within the dividend growth space.
Conclusion
Ultimately my recommendation for which to buy depends on the individual investor's goals, if they require current income SCHD seems like a great option, whereas DGRO provides similar total returns while distributing less capital to the shareholders.
While I do rate both of them a Buy, and there is no reason why one cannot own both, if I had to choose a favorite, I would select SCHD.
Why?
I already have exposure to "growthier" mega-cap names like Microsoft, and it's just not every day that you see funds with a high-yield strategy perform so well over time. SCHD would simply yield me greater diversification.
For further details see:
DGRO Vs. SCHD: The 2 Best Dividend ETFs For 2023