DGRO: Growing Dividend = Growing Earnings = Quality

seekingalpha04-29

The ETF focuses on high-quality US stocks with a history of steadily growing dividends and a maximum payout ratio of 75%.It follows the Morningstar US Dividend Growth Index, which includes companies ...

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What I like about iShares Core Dividend Growth (NYSEARCA:DGRO) ETF, is that it focuses on high-quality stocks that had to grow their dividends for at least five years. Of course, it is possible to increase the dividend without increasing profits by increasing the payout ratio, but the ETF also sets a limit of max. 75% payout ratio. This means that the trend must be in the direction of rising earnings. Overall, this is a very solid, defensive ETF, and I would like to show the specific characteristics and for whom it is suitable. ETF Overview & Methodology This ETF is based on the Morningstar US Dividend Growth Index (representative sampling method) and, as the name suggests, invests in US equities with a history of steadily growing dividends. Currently, it has $26.6B in assets under management, and the expense ratio is very low, at just 0.08%. The inception was in 2024, and currently, it pays a 2.36% dividend yield. The average annual dividend growth rate in the last five years was 9.70% and currently contains 423 stocks. Morningstar US Dividend Growth Index Since the ETF is based on this index, I want to focus more on it, as Morningstar provides the exact rules that define its composition.  The Morningstar US Dividend Growth Index is designed to provide exposure to securities in the Morningstar US Markets Index with a history of uninterrupted dividend growth and the capacity to sustain that growth. Morningstar  The main points of these rules are:  companies must have increased their dividend for at least five consecutive years positive earnings forecast payout ratio of less than 75% REITs are excluded  However, shares with very high dividend yields are also excluded; here is the exact statement:  In addition, a company's indicated dividend yield must not be in the top 10% of the US eligible universe, as companies with higher yields tend to reinvest less to fuel future growth and have less room to raise their dividend payments. Existing constituents that fall into this category are allowed to remain in the index if they have recently bought back shares and have not decreased their dividend payment. Morningstar  The exact portfolio construction also follows a few rules:  the exact number of stocks included varies depending on how many US stocks meet the rules individual stocks are capped at 3% to improve diversification weighted in proportion to their indicated dividends (tilts the portfolio toward larger and higher-yielding stocks) rebalanced annually in December  For who is the ETF suitable, and for who not? Morningstar .  While dividend income investing strategies tend to focus on generating the highest possible income stream, dividend growth strategies are typically geared toward stocks that have exhibited consistent dividend growth. Stocks with a history of consistently increasing their dividends can present compelling investment opportunities to investors, as these companies are typically high-quality firms with durable competitive advantages, histories of strong profitability & growth, and management teams that are committed to returning profits to shareholders. Morningstar  The result of this strategy is not necessarily the best performance (especially in euphoric market phases when growth stocks outperform value stocks), but definitely lower volatility. The following chart from Morningstar summarises the key characteristics and how the ETF currently compares to its 5-year average. In short, it focuses on large-cap value stocks with low volatility and higher yield. Morningstar Performance Over the last ten years, DGRO has underperformed the S&P 500, but it is not huge. In between, there have always been phases in which DGRO has performed better, for example, in 2022. The graph shows that much of the underperformance has occurred in euphoric phases (which favor growth stocks), such as the post-COVID era and the AI euphoria in the past few months. Seeking Alpha If you take this logic further, the DGRO will likely outperform again if the broad market falls, whether for pure valuation reasons, Black Swan events, or geopolitical tensions. In the latter case, in particular, this ETF is likely to perform significantly better, as far more defensive sectors are represented compared to the S&P 500  energy: 9% vs. 4% health: 16% vs. 12% utilities: 7% vs. 2.4%  So, who is the ETF for? In short, defensive investors who appreciate the benefits of value stocks: higher dividend yield than the broad market - but with a focus on rising earnings and therefore rising dividends, rather than maximum dividend yield and less volatility than the broad market. Perhaps it could also be said that if you have more time in your investment life and are therefore prepared to take a little more risk, this ETF is probably less suitable for you, and you could focus more on growth stocks. Of course, this depends very much on personal preferences and strategies and cannot be generalized. Valuation According to the Morningstar website, the current average P/E ratio is 17, while the price-to-cashflow ratio is only 13. What is even more interesting is that historical long-term earnings growth is 8.9%, and sales growth is 7.7%. The fact that earnings are growing faster than revenue suggests that companies are either buying back additional shares or improving their margins. Morningstar This is also listed on the Seeking Alpha DGRO page, but for completeness, here are the current top ten positions. Seeking Alpha Risks Compared to other ETFs, what specific risks are you more exposed to with this ETF? As I said, you are likely to miss out on returns in phases of a strongly rising market. Overall, this ETF is more focused on the so-called old economy of America, energy, utilities, and industry and less on the technological sectors of the 21st century. This means that if the American industry cannot withstand the intense competitive pressure, especially from Asia, in the long term, this would probably strongly influence the ETF. I have also noticed that the financial sector is much more strongly represented here than in the broad S&P 500 (19% vs. 13%). This is a complex issue, and the exact impact of a new financial crisis is impossible to predict, but this higher weighting of the financial sector would not be an advantage. Over the last few years, there have been increasing concerns that the US dollar could lose its global reserve currency function. However, these risk factors are general to the US market and not specific to this ETF. This is because these issues are highly complex and impossible to assess. Conclusion  I like growth ETFs very much because they contain high-quality assets, and as an investor, you can be almost certain that the dividend will increase every year. I am personally invested in a similar ETF. However, the DGRO is not authorized for European investors, and iShares has introduced a different ETF portfolio that meets the requirements. I personally invest a fixed amount in a monthly savings plan to benefit from the cost-average effect.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2431967338"}