An increasing number of dividend-focused exchange traded funds boast of being bastions of consistently rising payouts.
How that dividend growth is achieved varies from ETF to ETF, but a new entrant to the field could merit attention from income investors. The iShares Core Dividend Growth ETF (NYSEArca: DGRO) debuted in June as part of the 10-ETF expansion of the iShares core lineup. [New Additions to iShares Core Lineup]
DGRO joined the already established iShares Core High Dividend ETF (NYSEArca: HDV) in the core group and both ETFs charge just 0.12% per year, making them among the least expensive dividend ETFs on the market today. The two ETFs are noticeably different, implying dividend investors can use the funds in unison rather than exclusive of one another.
“Unlike HDV, which focuses on the yield of potential candidates, as its name suggests, DGRO constituents are screened based on recent dividend growth and sustainability of such growth. In light of this, relative to HDV, DGRO offers higher exposure to industrials (18.8% of assets), information technology (11.8%) and consumer discretionary (14.3%) and lower exposure to defensive health care (7.2%) and utilities (5.4%),” said S&P Capital IQ in a new research note.
DGRO’s combined 26% weight to consumer discretionary and technology names is something of a hallmark among the new genre of dividend growth ETFs because those sectors have been two of the largest contributors to S&P 500 dividend growth over the past several years. [Capturing Dividend Growth With ETFs]
DGRO, which S&P Capital IQ rates overweight, tracks the Morningstar US Dividend Growth Index. One of that index’s mandates is that constituent firms have a minimum of five years of uninterrupted dividend growth. Hence, the ETF’s relatively light weight of 6.9% to the financial services sector.
The minimum dividend increase streak featured by DGRO is not a trait of rival dividend growth ETFs, but the fund’s underlying index does employ other important screens to go along with the increase streak requirement, which can be seen as backward-looking.
For example, the Morningstar US Dividend Growth Index does not include companies with yields that rank in the top 10% of the eligible inclusion universe and only companies with a payout ratio of less than 75% can be included, according to Morningstar.
DGRO’s top-10 holdings include an array of companies with multi-decade dividend increase streaks, including Dow components Exxon Mobil (NYSE: XOM), Johnson & Johnson (NYSE: JNJ) and Wal-Mart (NYSE: WMT). [ETF Targets Dividend Consistency]
Investors that “believe that U.S. economic growth is poised to improve in late 2014 and into 2015, and are concerned that interest rates will move higher, iShares Core Dividend Growth ETF might make more sense. Despite its young age and lower yield, it has greater exposure to sectors and stocks that can benefit more an improving economic cycle,” said S&P Capital IQ.
iShares Core Dividend Growth ETF
ETF Trends editorial team contributed to this post.