This article was originally published on ETFTrends.com.
The iShares Core Dividend Growth ETF (DGRO) has struggled alongside the broader market to start 2018, but the fund's modest year-to-date decline could present prescient income investors with a buying opportunity.
DGRO tracks the Morningstar US Dividend Growth Index. One of that index’s mandates is that constituent firms have a minimum of five years of uninterrupted dividend growth. For example, the Morningstar US Dividend Growth Index does not include companies with yields that rank in the top 10% of the eligible inclusion universe and only companies with a payout ratio of less than 75% can be included, according to Morningstar.
Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
“Considering that in 2017 we saw three interest rate hikes from the Fed, it looks like dividend growth funds did slightly better with this backdrop. With a similar outlook expected for 2018, I anticipate similar outperformance for DGRO. The fund is growing its yield aggressively, and focuses on sectors that should do well in a growing economy, even when interest rates go up,” according to a Seeking Alpha analysis of DGRO.
A Deeper Dive Into DGRO
The $3.15 billion DGRO, which debuted nearly four years ago, holds over 450 stocks. Nine of the ETF's top 10 holdings are members of the Dow Jones Industrial Average and none of its holdings have weights exceeding 3.1%.
DGRO allocates about half its weight to financial services, healthcare and technology stocks, sectors that have historically performed well as interest rates rise.
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“DGRO is also reasonably priced when compared to the broader market, with a price to earnings (P/E) ratio of just over 20, while the S&P 500 has a P/E in excess of 24,” according to Seeking Alpha.
Additionally, DGRO's three-year standard deviation of 9.68% is below that of the S&P 500. Plus, DGRO charges just 0.08% per year, or $8 on a $10,000 investment, making it one the least expensive dividend ETFs.
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