7 Best Dividend Growth ETFs for 2017
Best Dividend Growth ETFs 2017
A few percentages of dividend yield may not seem like a big deal in today’s market. But, combined with consistent dividend growth, a portfolio of dividend stocks can deliver enormous returns over time. One way to invest in these top dividend stocks is through exchange-traded funds (ETFs) that have a special focus on dividend growth.
Let’s take a look at the best dividend growth ETFs for 2017.
Dividends can serve as a great indicator of a company’s performance. In this day and age, earnings can be adjusted, but dividends are always cold, hard, cash paid by companies to their shareholders.
Of course, a company can also borrow money to fund its dividend payments. But, in order for it to grow its dividends in the long run, the company needs a growing business. Looking around, the companies that have managed to provide investors with rising payouts through thick and thin share one thing in common: they always have some form of durable competitive advantage.
Durable competitive advantage works like an economic moat. It guards the company’s profits from its competitors so that, over time, shareholders can receive a steady—and hopefully increasing—stream of dividends.
Investors can choose to put money in individual dividend growth stocks, or they can use dividend growth ETFs. These are ETFs that holds tens of—and sometimes more than a hundred—stocks of dividend growth companies.
Because a dividend growth ETF usually contains stocks in many different industries, one ETF can provide a good level of diversification. For investors looking to generate a reliable stream of income, having a diversified portfolio is certainly of great importance.
Dividend growth ETFs also offer investors a relatively low-cost way of investing in a portfolio of dividend growth stocks. When an investor buys stocks from a brokerage, there is usually a fee for each transaction. While the fee is nothing substantial, it can quickly add up when you are buying hundreds of stocks at a time. A dividend growth ETF, on the other hand, allows an investor to own a large number of dividend stocks with one simple transaction.
And then there’s the peace of mind offered by dividend growth ETFs. These funds usually track an index, which is maintained by professionals. ETFs are usually rebalanced and reconstituted at fixed time intervals. Combined with the level of diversification, ETF investors don’t have to worry too much about, say, a bad earnings report from a specific dividend-paying company.
However, all these benefits come at a cost. Even the best dividend growth ETFs charge a fee. So before investing in them, investors should take a look at each ETF’s management expense ratio (MER).
High-Yield Dividend Growth ETFs
One thing to note is that the best dividend growth ETFs are usually not the highest-yielding ones. The reason lies in their holdings.
A dividend growth ETF usually holds dividend growth stocks, many of which have been raising their payouts for years. Because of their underlying competitive advantage and impressive dividend growth history, investors are willing to pay a premium for them. And since a company’s dividend yield moves inversely to its share price, the best dividend growth stocks are not known for having the highest yields. That’s why you won’t find many high-yield dividend growth ETFs in today’s market.
Just like investing in stocks, the best ETFs for an investor will depend on their investment goals and risk portfolios. For instance, if an investor is looking for a safe and steady income stream, they would probably be better off going with retirement ETFs than technology ETFs.
Now, let’s take a look at the seven best ETFs for dividend growth investors.
Dividend Growth ETF List
|ETF Name||Stock Exchange||Ticker Symbol||Management Expense Ratio (MER)|
|1||ProShares S&P 500 Dividend Aristocrats ETF||BATS||NOBL||0.35%|
|2||Vanguard Dividend Appreciation ETF||NYSEARCA||VIG||0.08%|
|3||iShares Core Dividend Growth ETF||BMV||DGRO||0.08%|
|4||WisdomTree U.S. Quality Dividend Growth Fund||NASDAQ||DGRW||0.28%|
|5||ProShares S&P MidCap 400 Dividend Aristocrats ETF||BATS||REGL||0.40%|
|6||SPDR S&P Global Dividend ETF||NYSEARCA||WDIV||0.50%|
|7||iShares International Dividend Growth ETF||BATS||IGRO||0.22%|
ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) is one of the top dividend ETFs for income investors. This is largely because of the index it tracks: the S&P 500 Dividend Aristocrats Index.
To become an S&P 500 Dividend Aristocrat, a company must be a constituent of the S&P 500 index and must have increased its annual dividend every year for at least 25 years. The index is equally weighted and rebalanced each January, April, July, and October. The annual reconstitution is completed during the January rebalance.
Raising one’s dividend every year for a quarter of a century is truly an impressive feat, so it’s no surprise that the S&P 500 Dividend Aristocrats Index contains some high-quality companies. Since its inception in 2005, the index has outperformed the S&P 500 index with lower volatility.
NOBL ETF is the only fund that tracks the S&P 500 Dividend Aristocrats index. The fund currently holds shares of 51 companies, with the three largest sector exposures being consumer staples (25.57%), industrials (17.78%), and healthcare (14.50%). (Source: “S&P 500 Dividend Aristocrats ETF,” ProShares, last accessed June 26, 2017.)
The ETF has a management expense ratio of 0.35%. Its current dividend yield is 1.73%.
#2 Vanguard Dividend Appreciation ETF
The S&P 500 Dividend Aristocrats Index is not the only index that measures the performance of top dividend growth stocks. Another widely-followed index is the NASDAQ U.S. Dividend Achievers Select Index. Investors can use the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) to track this index.
The NASDAQ U.S. Dividend Achievers Select Index is made up of companies that have increased their annual dividend payments for a minimum of 10 years. The index is weighted by modified market capitalization. Its constituents are evaluated every year in March.
The Vanguard dividend growth ETF provides a low-cost way of investing in dividend growth stocks. It has an annual expense ratio of just 0.08%, which is 92% lower than the average expense ratio of funds with similar holdings.
VIG ETF currently holds 188 stocks. Its three biggest holdings are Microsoft Corporation (NASDAQ:MSFT), PepsiCo, Inc. (NYSE:PEP), and Johnson & Johnson (NYSE:JNJ). At the current share price, the fund is yielding 2.06%. (Source: “Vanguard Dividend Appreciation ETF,” The Vanguard Group, Inc., last accessed June 26, 2017.)
Very few companies have managed to consistently raise their payouts for decades. I mean, even having 10 years of uninterrupted dividend hikes is not easy to achieve, due to what happened during the Great Recession. For investors who want exposure to a larger number of companies with dividend growth potential, they might want to consider iShares Core Dividend Growth ETF (BMV:DGRO).
DGRO ETF aims to track the investment results of the Morningstar U.S. Dividend Growth Index. While not as popular as the previously mentioned indices, the Morningstar U.S. Dividend Growth Index does offer a few insights about the underlying dividend-paying companies.
To make it into this index, a company must have at least a five-year history of dividend increases. It also needs to have a payout ratio of less than 75% and a positive consensus earnings forecast from analysts. The index excludes real estate investment trusts (REITs), as well as stocks with dividend yields in the top 10% of the market.
Note that if a company does not increase its dividend in a year but it repurchased its shares, it would remain in the index.
DGRO ETF tracks this index. The fund has 434 holdings. With the index’s fundamental, dividend-based weighting system, the ETF’s top three holdings are Pfizer Inc. (NYSE:PFE), Johnson & Johnson, and Exxon Mobil Corporation (NYSE:XOM). (Source: “iShares Core Dividend Growth ETF,” iShares, last accessed June 26, 2017.)
iShares Core Dividend Growth ETF boasts a low expense ratio of 0.08%. It is currently yielding 2.01%.
#4 WisdomTree U.S. Quality Dividend Growth Fund
Most dividend growth ETFs track indices that are constructed based on a companies’ dividend history. But we all know too well that past performance does not guarantee future results. Is there a dividend growth ETF that uses a forward-looking methodology?
There is: WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ:DGRW).
DGRW ETF tracks the investment results of the WisdomTree U.S. Quality Dividend Growth Index. The screening process for this index contains three-year average returns on assets (ROA) and three-year average returns on equity (ROE), as well as long-term earnings growth expectations. The index is weighted by dividend per share times share outstanding to reflect the share of each company’s aggregate cash dividends. (Source: “WisdomTree U.S. Quality Dividend Growth Fund,” WisdomTree, last accessed June 26, 2017.)
DGRW ETF was created in 2013. Today, it has 293 holdings, with the top three being Johnson & Johnson, Apple Inc. (NASDAQ:AAPL), and Microsoft Corporation. The fund has a management expense ratio of 0.28% and an annual dividend yield of 1.94%.
Large-cap, blue-chip companies have been some of income investors’ favorites. They often have deeply entrenched positions in their respective markets, and are known for paying uninterrupted dividends. However, a company doesn’t need to command tens of billions of dollars of market cap to qualify as a dividend growth stock.
In fact, there are plenty of mid-cap companies that have provided shareholders with growing income over the years. ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS:REGL) is a fund that can help investors tap into some of the best mid-cap dividend growth stocks.
REGL ETF tracks the investment results of the S&P MidCap 400 Dividend Aristocrats Index. The index includes S&P MidCap 400 companies that have raised their dividend payments for at least 15 years.
The fund has an expense ratio of 0.40% and a dividend yield of 1.10%. Its top three sectors right now are financials (28.73%), utilities (20.43%), and industrials (16.29%). (Source: “S&P MidCap 400 Dividend Aristocrats ETF,” ProShares, last accessed June 26, 2017.)
#6 SPDR S&P Global Dividend ETF
Dividend growth ETFs are not just limited to U.S.-based companies. For income investors who want some exposure to international stock markets, there are ETFs that focus exclusively on global dividend growth stocks.
SPDR S&P Global Dividend ETF (NYSEARCA:WDIV) tracks the S&P Global Dividend Aristocrats Index. This index includes members of the S&P Global Broad Market Index that have paid steady or increasing dividends for a minimum of 10 years. It follows a yield-driven weighting method, but caps the weight of each company at three percent. The index is rebalanced annually in January. (Source: “SPDR S&P Global Dividend ETF,” State Street Global Advisors. SPDR, last accessed June 23, 2017.)
WDIV ETF has an annual dividend yield of 3.83%, which is higher than most dividend growth ETFs in today’s market. The fund’s management expense ratio is 0.4%.
iShares International Dividend Growth ETF (BATS:IGRO) is another global dividend growth ETF. The fund tracks the Morningstar Global ex-U.S. Dividend Growth Index.
IGRO ETF follows a similar strategy as the DGRO ETF we looked at earlier. Among other criteria, IGRO chooses companies with five or more years of dividend increases (that are not REITs), positive earnings forecasts, and a payout ratio of less than 75%. (Source: “iShares International Dividend Growth ETF,” iShares, last accessed June 26, 2017.)
IGRO made its debut in May 2016, so it’s a relatively new player in the ETF world. The fund currently has 418 holdings and charges a management fee of 0.22%.
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