A Dividend Growth ETF Right for the Times
This article was originally published on ETFTrends.com.
With inflation trending higher and investors showing a preference for quality stocks, some dividend growth strategies could stand out on the current market environment. The iShares Core Dividend Growth ETF (DGRO) is a name to consider from that group.
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.
The first quarter “saw strong investments in emerging and international developed markets ETFs, as people sought to both broaden their opportunity set and reduce over-concentration in U.S. stocks,” said BlackRock in a recent note.
Fed Speculation Continues
With speculation high that the Federal Reserve could raise interest rates multiple times this year, the time is right for dividend investors to consider dividend growth stocks over high dividend names, which are usually more sensitive to changes in interest rates.
Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Dividend growers have also proven to be effective ways of protecting portfolios against the effects of inflation.
“At the same time, investors abandoned defensive stocks (think utilities, telecom and other typical high-yielders), which can be sensitive to inflation and rising rates,” said BlackRock. “They turned instead to higher quality, dividend-growth ETFs—companies with sound balance sheets and likely to keep up with inflation.”
Related: A Smart Beta Bond ETF Idea Worth Considering
While a rise in rates would diminish the attractiveness of dividend stocks with premium valuations and low growth, more high quality dividend payers or the group of dividend growers may stand out. DGRO allocates about half its weight to financial services, healthcare and technology stocks, sectors that have historically performed well as interest rates rise.
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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