U.S. Markets close in 1 hr 31 mins

Focus on Stocks with Strong Dividend Growth with These 5 ETFs

Eric Dutram

In times of market uncertainty, it can be an excellent idea to focus on dividends. These cash payouts are usually pretty stable, and they can act as a nice cushion in bear market environments.

However, with the Fed poised to end QE and possibly raise rates in the not too distant future, some high dividend stocks and ETFs could be hit hard. That is because high payout companies are generally seen as less attractive as bond rates rise as competition for income investors intensifies.

With this backdrop it might be an especially good time to focus on companies that have a strong history of growing dividends, as opposed to those which give out the largest payouts. This technique results in a portfolio of ultra-strong companies, and it is more immune to rising rates as well (see 3 Dividend ETFs Crushing the Market).

Not only that, but dividend growers have actually outperformed the broad market over a long time period, and with less risk too. According to Oppenheimer Funds, from the period of 1972-2013, dividend growers (and initiators) put up an average gain of 10.1% with an annualized standard deviation of 16.1, compared to all dividend paying stocks which had 9.3% a year return with a 16.9 standardized deviation, and then all non-dividend-paying stocks which saw average yearly returns of just 2.3% with a standard deviation of 25.3.

Clearly, over long time periods there is definitely something to this dividend growth focus, and given how uncertain global markets appear right now, this approach could warrant a place in your portfolio now (read Dividend ETFs Explained: What Investors Need to Know).

How to Invest?

Fortunately for investors, there are several ETFs which focus only on companies that have strong track records when it comes to consistently raising dividend payouts year after year. Below, we highlight some of the most popular choices in this space, any of which could be interesting selections for investors seeking to zero-in on companies that have great histories of dividend increases over the long haul:

SPDR S&P Dividend ETF (SDY)

This extremely popular ETF tracks the S&P High Yield Dividend Aristocrats Index, a benchmark that currently has just less than 100 companies in its portfolio. The index holds the highest yielding companies that have consistently increased dividends every year for at least the past two decades.

The portfolio is heavy in financials (21.8%), staples (15.7%), and industrials (13.5%), while it is light in technology, telecoms, and energy, as all three of these combine to make up roughly 10% of the portfolio. Individual holdings are pretty spread out though, as no single company accounts for more than 2.6% of assets (also see 3 Unbeatable Dividend ETF All-Stars for Your Portfolio).

The fund is a relatively cheap choice in the space, as it costs just 35 basis points a year in fees, while the yield comes in at 2.3% for 30 Day SEC Yield terms. The fund also receives a Zacks ETF Rank #2 (Buy), while it sees solid volume of over half a million shares each day on average.

iShares Core Dividend Growth ETF (DGRO)

By far the newest entrant on the list, DGRO was released in June of 2014 tracking the Morningstar US Dividend Growth Index. This benchmark also focuses on companies with a history of consistently increasing dividends, holding over 250 companies in its portfolio.

Industrials (18.8%), consumer goods (14.5%), and consumer services (14.4%), take the top three spots in the portfolio, while materials, defensive consumer and consumer cyclical combine to make up less than 10% of the total. The top holdings have a large cap tilt, with firms like MSFT, PG, and IBM taking the top three spots, though each of these account for less than 3.3% of the total.

This fund, due in part to its newness, doesn’t have the volume of many of the others on this list, while its performance history is also short. However, it does have a yield in line with others on the list at 2.24% in 30 Day SEC terms while it is a cheap choice with an expense ratio of just 12 basis points a year.

Vanguard Dividend Appreciation ETF (VIG)

Vanguard’s entrant in the space is a very popular one, tracking the Nasdaq US Dividend Achievers Index. This benchmark holds about 160 companies in its basket that have a solid track record of increasing dividends over time (also see Dividend ETFs Hitting New Highs).

Top sectors in this ETF include consumer goods, consumer services, and industrials, all of which account for at least 14.7% of the total, while telecom, utilities, and materials are very light in VIG. Current top holdings include JNJ, KO, and PEP, giving the fund a large cap focus.

The yield is a bit light here when compared to others on the list, as the 30 Day SEC payout is just over 2%. However, what it lacks in yield it makes up for in tradability and expenses, as it trades over 750,000 shares a day on average while expenses are just 10 basis points a year.

PowerShares Dividend Achievers ETF (PFM)

This fund tracks the Nasdaq US Broad Dividend Achievers Index, tracking a basket of close to 250 companies. The focus here is on companies that have increased their annual dividends for 10 or more consecutive fiscal years, thus focusing on consistently increasing dividend payers.

Consumer staples (22.9%), energy (16.4%), and industrials (14.4%) take the top spots in this ETF from a sector perspective, while telecoms, utilities, and materials are the smallest, as none of these account for more than 5.2% of the total. Large caps do dominate from a cap look though, with JNJ, PG, and CVX taking the top spots and all making up roughly 4% of assets each.

This fund is a bit pricier compared to many others on the list at an expense ratio of 55 basis points a year in total fees. However, it does have a solid 30 Day SEC yield of 2.17%, while it has seen decent interest from investors as evidenced by its $350 million AUM level (read Guide to Dividend Aristocrat ETFs).

ProShares S&P 500 Aristocrats (NOBL)

ProShares is usually known for its leverage and inverse options, but it has been making inroads in the unlevered market with funds like NOBL. This relatively new fund tracks the S&P 500 Dividend Aristocrats Index, holding about 55 companies which have all increased dividends each year for at least the past quarter century.

This portfolio is equal weighted so concentration issues aren’t an issue from a single stock perspective. However, the ETF does have a big allocation to the consumer sector, while industrials, materials, health care and financials all receive double digit weightings in this fund too.

Despite launching late in 2013, NOBL has developed a decent sized following with close to a quarter billion in AUM. The fund is a cheap to middle of the road product in this space from a cost perspective, charging 35 basis points a year in fees, though its SEC 30-Day Yield comes in a little on the light side at 1.9%.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Read the analyst report on SDY

Read the analyst report on DGRO

Read the analyst report on VIG

Read the analyst report on PFM

Read the analyst report on NOBL

Zacks Investment Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report