One of that index’s mandates is that constituent firms have a minimum of five years of uninterrupted dividend growth. 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.
Six sectors – financial services, consumer staples, industrials, technology, healthcare and consumer discretionary – command double-digit allocations in DGRO. Nine of the top 10 holdings in the ETF are members of the Dow Jones Industrial Average.
Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.
“Further, as a safety measure, stocks with an indicated dividend yield in the top 10% of the universe are eliminated. In many cases, when a company’s dividend reaches this level, it can indicate financial distress and/or a high likelihood of dividend cuts. Finally, all dividends must quality for preferential tax rates, thus no REITS are included. The index is reconstituted once per year and, at that time, no single constituent may carry more than a 3% weighting in the index,” adds Seeking Alpha.
For more information on dividend stocks, visit our dividend ETFs category.