Dividend growth investing aims to generate a growing stream of dividend income along with long-term capital appreciation. For investors looking to tap into this strategy in a diversified, low-cost way, two compelling options are the WisdomTree U.S. Quality Dividend Growth Fund (DGRW) and the iShares Core Dividend Growth ETF (DGRO). But understanding the nuances between these two ETFs is key to determining which, if either, is right for your portfolio.
An Introduction to Dividend Growth Investing
Dividend growth investing centers around owning shares of quality companies that have track records and future potential for steady dividend increases over time. The power of this approach is twofold:
- Growing dividend income helps hedge against inflation and can fund lifestyle needs in retirement
- Historically, dividends have accounted for up to 42% of the total return investors have earned from the S&P 500
By focusing on companies committed to consistently raising their payouts, investors position themselves to benefit from compounding and a rising income stream in addition to long-term capital appreciation.
gaining exposure through ETFs
Rather than attempting to build a diversified portfolio of individual dividend growers, many investors sensibly opt for an exchange-traded fund (ETF) strategy. ETFs provide low-cost, transparent access to bundles of stocks that meet specified criteria. When it comes to dividend growth, DGRW and DGRO are two compelling options for exposure.
Launched in 2015, the WisdomTree U.S. Quality Dividend Growth Fund (DGRW) tracks an index consisting of large-cap U.S. companies with growth characteristics and strong fundamentals. The resulting 300-stock portfolio is weighted by dividends projected to be paid over the coming year.
The iShares Core Dividend Growth ETF (DGRO), launched in 2014, follows a index of U.S. companies that have increased their dividends for at least five consecutive years. The 400+ stock portfolio is weighted by dividend dollars with regulatory constraints capping position sizes.
So which ETF is the better choice? Let’s do a head-to-head comparison.
Comparing DGRW and DGRO
Weighting Methodology and Portfolio Construction
Due to the different weighting schemes, DGRO‘s portfolio ends up more equal-weight in nature while DGRW concentrates heavier bets in its top holdings. DGRW‘s top 10 positions account for around 30% of assets compared to about 20% for DGRO. This results in some key sector differences…
Sector Exposures
The most noticeable distinction lies in technology exposure. DGRW allocates over 28% of its portfolio to tech stocks which is nearly double DGRO‘s 15% tech weighting. The drivers are mega-cap stocks like Apple and Microsoft which dominate DGRO‘s market-cap weighted approach. DGRW‘s future dividend focus allows it to identify undervalued tech names with strong total return potential.
On the flip side, DGRO offers much larger stakes in more defensive sectors like Healthcare and Consumer Staples which investors may desire for risk management purposes. DGRO also provides exposure to some higher yielding stock categories such as Utilities and Real Estate.
Historical Performance
In the annual return department, DGRW maintains a slight but meaningful edge over its competitor. Since its inception in 2015, DGRW has delivered an annualized return over six percentage points greater than DGRO. Much of this outperformance occurred more recently as investors turned to the quality-focused approach during 2022’s turbulent market:
Annualized Trailing Returns:
DGRW:
1 Year: 4.3%
3 Years: 12.7%
Since Launch (2015): 13.8%
DGRO:
1 Year: -3.5%
3 Years: 9.6%
Since Launch (2014): 10.7%
And while lower returns may be partially attributed to DGRO‘s defensive tilt, its concentration approach also likely benefited DGRW more in the rally off 2022‘s lows.
[insert return chart over time]Nevertheless, while important for evaluating an ETF‘s historical ability to outperform its stated goal, past returns alone should not dictate investment decisions. Future dividend income potential is paramount.
Earnings Growth and Dividend Coverage
When ranking companies on dividend growth potential, both ETFs utilize multi-factor models assessing fundamental health, management quality, and other metrics predictive of a firm‘s ability to sustain payout increases.
However, DGRO specifically excludes REITs and companies forecasted to distribute more than 75% of earnings as dividends over the next year. The goal is to minimize exposure to yield traps with limited growth prospects. DGRW‘s weighting approach may naturally screen some of these companies out.
DGRW also particularly emphasizes expected earnings growth with its 100+ indicator model, while DGRO focuses more on dividend metrics like longevity and payout ratios. This manifests itself in more exposure to high growth categories like Information Technology for DGRW.
Both provide solid dividend growth potential, but DGRW is more explicitly catered as a growth-oriented dividend ETF.
Which is Right for Me?
Analyzing ETF holdings is helpful but different investors have different aims. As you assess DGRW and DGRO, consider your risk tolerance, income needs, expected holding period, and how the funds align with the rest of your investment strategy.
Here are a few closing thoughts:
- For investors with above average risk appetite looking to amplify growth over a long-term horizon, DGRW may be preferable
- Income-focused investors wanting to minimize volatility may favor DGRO’s value/yield tilt
- Those wanting a "core" dividend growth holding for steady compounding may choose DGRO for its simplicity
- As always, maintaining a diversified portfolio with non-overlapping exposures is wise no matter your choice
The bottom line? Understanding what each ETF offers will lead to a better-informed decision for your dividend growth allocation.