The universe of dividend exchange traded funds continues to expand and that expansion is being supported in part by ongoing dividend growth from U.S. companies.
“According to S&P Dow Jones Indices, 971 dividend increases were reported during the fourth quarter of 2014 compared to the 885 increases which were reported during the fourth quarter of 2013. For all of 2014, 3308 issues increased their payments, up 14.3% from the 2895 issues that increased their payments during 2013,” said S&P in a note out earlier this month. [Big Year for Dividend ETFs]
Dividend ETFs pulled in over $10 billion in new assets last year, making payout funds accelerators of asset growth by strategic beta ETFs.
The iShares Core Dividend Growth ETF (NYSEArca: DGRO) is a newer dividend ETF that is worth a look by income investors in 2015. With significant differences at the sector level, DGRO can act as a complement to its wildly popular stablemate, the iShares Select Dividend ETF (NYSEArca: DVY). [New Faces and Old Friends Among Dividend ETFs]
“The biggest difference stems from the stocks inside the Morningstar index it tracks that are selected based on sustainability of dividend growth. Information technology (14% of assets) stocks such as Microsoft (NasdaqGS: MSFT) are among the most represented, while utilities (6%) have a much smaller weighting. Consumer staples (17%) stocks make up the biggest stake. In addition, the weighted average market capitalization for DGRO is $105 billion, higher than DVY’s $36 billion,” said S&P Capital IQ in a new research note.
DGRO debuted in June 2014 as part of the expansion of the iShares core lineup, meaning the ETF carries with an expense ratio of just 0.12%, one of the lowest among U.S. dividend ETFs. The ETF has $153.3 million in assets under management, making it one of the most successful ETFs to debut last year.
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. [New Core Dividend Growth Idea]
“DGRO’s ranking is also supported by relatively high S&P Capital IQ Quality Rankings and relatively low S&P Capital IQ Qualitative Risk Assessments. However, more of its holdings are considered undervalued according to S&P Capital IQ than in DVY. DGRO’s short history is not a concern to us since we do not rely on past performance in ranking ETFs,” said S&P Capital IQ.
iShares Core Dividend Growth ETF
Tom Lydon’s clients own shares of DVY.