Can an ETF Provide Real Dividend Income Growth?

26 Dec 2019 12:34
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Back in 2011 I started shifting my portfolio to a more dividend focus. Since that time I kept a notebook of different ideas and things I learned along the way. The other day I decided to flip through some of the earlier pages and revisit some of my comments when I started this journey and stumbled upon one note from 2012 that said “Not enough history on dividend growth ETFs – revisit and analyze in 5 years”.

Apparently I forgot about this note as it was 7 years ago and I never did investigate further. But the thought nagged at me as it was still relevant and was making me question if an ETF is a simpler approach. Of course I had to address this nagging feeling so here is my analysis 2 years late.

Screening Criteria

  • Minimum of $1 billion of Assets Under Management
  • Minimum of 5 years of consecutive annual increases in distributions
  • Minimum dividend yield of 1.7%

Screen Results:

The iShares Core Dividend Growth ETF (DGRO), specifically targets companies that pay a qualified dividend, must have at least five years of uninterrupted annual dividend growth and their earnings payout ratio must be less than 75%.

The WisdomTree US LargeCap Dividend ETF (DLN), seeks to track the performance of dividend-paying large-cap companies in the U.S. equity market. The WisdomTree Large Cap Dividend Index consists of the 300 largest companies ranked by market cap from the WisdomTree Dividend Index.

The iShares Select Dividend ETF (DVY), seeks to track the investment results of the Dow Jones U.S. Select Dividend Index composed of relatively high dividend paying U.S. equities with fund weightings determined by yield instead of market cap.

The Schwab US Dividend Equity ETF (SCHD), includes 100 stocks based on strong fundamentals, such as cash flow to debt, return on equity, dividend yield and consistent dividend payouts for at least 10 consecutive years.

The Vanguard Dividend Appreciation ETF (VIG), tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years.

The Vanguard High Dividend Yield ETF (VYM), seeks to track the performance of the FTSE High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.

I will admit I was surprised by this and expected a larger return of ETFs, however, it may signal that this is more of a total return investment philosophy than a pure income growth play.

Comparative Analysis

The top three performers are highlighted in green for each category.


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Conclusion

From a pure dividend growth perspective there were 3 consistent ETFs results with DVY, SCHD and VYM.

When we look at the 6 ETFs from a total return perspective we see much better results from DGRO, DLN, and VIG. This performance difference is more than likely based on what holdings constitute their portfolios. For example, DVY has the lowest 5 year total return but their holdings are heavily weighted towards financials and utilities. But VIG has a more diverse and higher quality amount of holdings.

This leads me back to why the screening results were so low and that most dividend growth labeled ETFs are designed for a total return strategy. If your objective is total return you should balance this with other growth type ETFs and here an interesting article I found on this topic from last November by John Hancock Investments. That said, this analysis and ETF screen did not factor in total return and if this is your strategy you should expand the search as there may be better investments.

For those more interested in a consistently rising ETF dividend income stream I would narrow it down SCHD and VYM. The two funds have low expense fees and decent dividend growth rates that well exceed the rate of inflation.

Overall, if you are uncomfortable picking individual stocks but want a dividend income stream ETFs are a viable option to achieve this result.

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