A Darling Among Dividend Growth ETFs

High dividend strategies may seem like the way for income investors to go with the Federal Reserve looking like it could cut interest rates later this year, but dividend growth exchange traded funds, including the iShares Core Dividend Growth ETF DGRO still merit consideration.

What Happened

DGRO tracks the Morningstar US Dividend Growth Index and holds 480 stocks, giving it one of the larger rosters among dividend growth ETFs. That index requires members firms to have minimum dividend increase streaks of at least five years, one of the more liberal requirements in the universe of dividend growth ETFs.

Importantly, DGRO's underlying index also excludes companies with excessively high yields and only permits the inclusion of companies with payout ratios of less than 75%.

Why It's Important

While high dividend funds can also be chock full dividend growers, sector exposures are meaningfully different between ETFs like DGRO and funds that focus on high-yield stocks.

“While both strategies provide access to high quality dividend-oriented companies, their differing investment objectives and quality screens lead to different exposures,” said BlackRock in a recent note.

High-yield dividend ETFs are often heavily allocated to consumer staples, utilities and real estate sectors, which can be a boon when Treasury yields decline. Those groups, however, combine for just over 16% of DGRO's roster.

“As for companies that grow their dividends, the graph below shows they are concentrated within Financials as well as more growth-oriented sectors like Information Technology and Consumer Discretionary,” according to BlackRock.

Technology is DGRO's second-largest sector weight at 16.32%.

“Information technology for example, contains companies which may have recently begun paying dividends with large amounts of cash flow at their disposal, allowing for consistent dividend growth,” said BlackRock. “These sector differences lend the strategies to offer different risk and return profiles.”

What's Next

Dividend investors can allocate to both high dividend and payout growth ETFs, a strategy that could prove rewarding if the Fed moves forward with lowering interest rates.

“Dividend growth strategies break that mold with growth-oriented exposures and less sensitivity to interest rates,” said BlackRock. “The distinctions between these strategies mean they can be used separately or together, to provide a comprehensive and diversified income solution.”

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