When it comes to dividend ETFs, the iShares Core Dividends Growth ETF (DGRO) often plays second fiddle to its popular counterpart, SCHD. However, a closer look reveals that DGRO possesses unique qualities that may give it an edge in the long run.
In this article, we will delve into the fundamentals, portfolio holdings, and performance of DGRO to understand its potential for investors seeking both growth and dividends. Let’s begin the exploration.
Fundamentals of DGRO
Established on June 10th, 2014, DGRO is a relatively new fund compared to SCHD, which was launched in 2011. DGRO manages approximately $23 billion in assets, half of SCHD’s impressive $45 billion.
The fund carries an expense ratio of 0.08%, slightly higher than SCHD’s 0.06%. However, DGRO boasts a favourable beta of 0.89, indicating less volatility than the overall market.
Since its inception, DGRO has delivered a total return of 147.47% with dividends reinvested, closely mirroring the performance of the S&P 500. Notably, DGRO has outperformed SCHD by approximately 5% year-to-date.
Looking further back to the bear market of 2022, DGRO has outperformed both the S&P 500 and SCHD by 4% and 2%, respectively. These figures suggest that DGRO has demonstrated resilience and the potential for solid returns.
Understanding the Morningstar U.S. Dividend Growth Index
DGRO seeks to replicate the Morningstar U.S. Dividend Growth Index, which employs specific eligibility criteria to select its holdings. The index includes companies with a positive indicative dividend yield, excluding real estate investment trusts (REITs).
It focuses on stocks with at least five years of consecutive dividend growth, positive consensus earnings forecasts, a payout ratio below 75%, and an indicative yield outside the top 10% of the dividend-screened universe.
Diversity and Portfolio Holdings
DGRO holds a diverse portfolio of 446 stocks, significantly more than SCHD’s 103 stocks. Its holdings span various sectors, with healthcare stocks occupying the majority at around 20%.
Financials, technology, and consumer defensives represent 17.5%, 16.8%, and 11.2% respectively. The fund is rebalanced quarterly, contributing to its slightly higher turnover rate compared to SCHD.
The Impact of Dividend Dollars
DGRO’s weighting is based on dividend dollars, which correspond to the actual amount of money paid to shareholders as dividends.
This weighting favours larger companies that distribute higher dividend dollars, irrespective of their underlying dividend growth or company quality. However, individual positions are capped at approximately 3% of the portfolio, mitigating the impact of this strategy.
The Growth vs. Dividend Yield Dilemma
One of the reasons DGRO may be overshadowed by SCHD is its lower dividend yield and dividend growth. SCHD currently offers a dividend yield of 3.7%, while DGRO provides a yield of 2.5%. SCHD also exhibits a higher five-year dividend growth rate at 15.56%, compared to DGRO’s 10.32%.
However, when considering price return, which excludes reinvested dividends, DGRO has consistently outperformed SCHD by almost 20%. This performance discrepancy suggests that DGRO prioritizes growth over dividend yield, making it an attractive option for investors seeking growth at a lower price.