For dividend investors, an ETF with a dividend yield of 2.4% might not sound like much to get excited about, especially when there are plenty of investment products out there offering double-digit dividend yields these days. However, let’s take a look at the iShares Core Dividend Growth ETF (NYSEARCA:DGRO) to see why a dividend ETF with a lower yield like this should still be on the radars of dividend investors.
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What Does the DGRO ETF Do?
Launched in 2014, DGRO is a dividend growth ETF from BlackRock’s (NYSE:BLK) iShares that yields 2.4% and pays a dividend on a monthly basis. It invests in U.S. stocks with growing dividends and has become a fairly popular ETF, with $23.5 billion in assets under management (AUM).
Why Dividend Investors Should Care about an ETF with a 2.4% Yield
At first glance, DGRO’s 2.4% dividend yield doesn’t sound like much to write home about, especially when there is no shortage of higher-yielding options out there. However, here’s why DGRO is still worthy of consideration by dividend investors: its strategy of investing in dividend growth stocks is a sound one that could lead to greater total returns over time than simply investing in stocks or ETFs with high yields.
Stocks with growing dividend payouts obviously offer the benefit of an increasing dividend payout over time. But beyond that, these companies usually have sound fundamentals, exhibiting strong earnings growth and profitability.
So, by investing in dividend growth stocks, investors are getting the dual benefit of owning dynamic, growing companies with increasing earnings and strong profitability that should appreciate in value over the long run, combined with the added bonus of increased dividend income over time.
Research shows that historically, dividend growth stocks have outperformed the broader market. For example, over the past 50 years, dividend-paying companies have outperformed the broader market with a 9.2% annualized total return, compared to a 7.7% annualized return for an equal-weighed S&P 500 (SPX) Index.
However, narrowing the focus to companies with growing dividends (or ones initiating a dividend) supercharged these results even more — dividend growth stocks and dividend initiators returned an even better 10.2% on an annualized basis over the same 50-year time frame.
Furthermore, just looking at stocks with high yields doesn’t tell you the whole story when it comes to dividends. The yield could be high because the stock price has gone down 50%, which may not bode well for your investment. Or if the yield is too high, it could be unsustainable and in danger of being cut if the company has declining earnings and cash flow and won’t be able to support the dividend for much longer.
Dividend Growth Portfolio
To illustrate this point, look at the overview of DGRO’s top 10 holdings in the table below. While tech mega caps like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), and Broadcom (NASDAQ:AVGO) aren’t the first stocks that come to mind when you think of high dividend payouts, they have all combined strong performance with increasing dividend payouts in recent years, creating a winning combination for investors. (Apple has increased its annual dividend payout for nine years in a row, Microsoft for 18, and Broadcom for 12, all while appreciating in value significantly in terms of their share prices).
In addition to these tech leaders, you’ll also find blue-chip names from a variety of sectors in DGRO’s top 10 holdings, ranging from JPMorgan Chase (NYSE:JPM) to Home Depot (NYSE:HD), and energy majors like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX).
DGRO is also incredibly diversified, with 430 holdings. Furthermore, its top 10 holdings only make up 25.9% of the fund, so there isn’t much concentration risk here.
Another great thing about this portfolio is that while it’s made up of plenty of blue-chip holdings, investors aren’t paying much of a premium for them when it comes to valuation. DGRO’s current price-to-earnings ratio is just 16.7, which is actually a decent discount to the broader market. The average price-to-earnings multiple for the S&P 500 is currently just under 20.
Is DGRO Stock a Buy, According to Analysts?
Turning to Wall Street, DGRO has a Moderate Buy consensus rating, as 55.42% of analyst ratings are Buys, 38.89% are Holds, and 5.7% are Sells. At $56.92, the average DGRO stock price target implies 10% upside potential.
DGRO Has Low Fees
Another nice thing about DGRO is its low expense ratio of just 0.08%. This means that an investor putting $10,000 into DGRO today would only pay $8 in fees over the course of the next year. Assuming the fee remains the same and that the fund returns 5% a year going forward, this investor would pay just $26 in fees over three years, $45 over five years, and $103 over 10 years.
This low fee can make a big difference over time, and it won’t eat away at the gains investors are building over the years through dividend payments and capital appreciation.
Solid Long-Term Performance
As of the end of June, DGRO has a very respectable three-year annualized total return of 13.6%. Over the past five years, its annualized total return is a still solid 11.1%. Since its inception in 2014, DGRO has managed to return an impressive 10.9% on an annualized basis.
It should be noted that these returns slightly lag those of the broader market over the same time frame, as the Vanguard S&P 500 (NYSEARCA:VOO) has returned 14.6% and 12.3% over the same three and five-year time frames, respectively.
However, I’m willing to give DGRO the benefit of the doubt here as 1) double-digit annualized returns are still a great way to build long-term wealth, 2) the returns are fairly close to those of VOO, and 3) dividend growth stocks have been a winning strategy over the past 50 years, so it’s possible that DGRO could outperform the broader market at some point in the future.
Investor Takeaway
Despite a dividend yield of just 2.4%, DGRO is an ETF that should be on the radars of dividend investors. Investing in dividend growth stocks has historically been a fruitful approach, and generally speaking, it gives investors exposure to strong companies with growing dividends and growing earnings as opposed to companies that may feature high yields but are struggling to stay afloat.
DGRO is also an appealing option for dividend investors (and all investors) based on its well-diversified portfolio of blue-chip holdings, the moderate valuation of this portfolio, and its low costs.
