New Highs For a Dividend Growth ETF

Select dividend strategies continue delivering for investors in 2017. The iShares Core Dividend Growth ETF (NYSEArca: DGRO) is one of the exchange traded funds that is part of that conversation. DGRO is up about 21% year-to-date after being one of about 120 ETFs that hit all-time highs last Friday.

DGRO 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. 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 has a trailing 12-month dividend yield of 1.92%, which is only slightly higher than the dividend yield on the S&P 500. While DGRO’s yield is not high, there are benefits, which include the capacity for dividend growth.

Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.

While a rise in rates would diminish the attractiveness of dividend stocks with premium valuations and low growth, more high quality dividend payers or the group of dividend growers may stand out. 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. With interest rates rising, high-yield dividend stocks could lag while dividend payers with lower yields and quality traits could outperform.

DGRO’s sector exposures are well-balanced between cyclical and defensive groups. The cyclical technology and financial services sectors combine for almost 35% of the ETF’s weight, but DGRO plays defense with a combined weight of over 28% to healthcare and consumer staples stocks. DGRO’s three-year standard deviation is just below 10%.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.