Why DGRW Is Not A Great Dividend Snowball - What To Pick Instead

seekingalpha05-23

The WisdomTree U.S. Quality Dividend Growth Fund ETF has generated strong total returns in recent years.However, there are several glaring weaknesses that make it unsuitable as a dividend snowball.We ...

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PM Images The WisdomTree U.S. Quality Dividend Growth Fund ETF (NASDAQ:DGRW) is a popular dividend growth investment fund, boasting over $13 billion in assets under management and enjoying strong growth in recent years: Data by YCharts This article takes a closer look at DGRW, comparing it to its peers, to evaluate its effectiveness as a dividend growth investment and explore how it can be improved. DGRW As A Passive Income Snowball First of all, DGRW has demonstrated a solid track record in recent years from a total return perspective when compared to some of its peers: Data by YCharts However, when looking under the hood, it is much less attractive. For example, its expense ratio is relatively high at 0.28%, which is above those of its peers like the Schwab U.S. Dividend Equity ETF (SCHD), the Vanguard Dividend Appreciation ETF (VIG), and the Vanguard High Dividend Yield ETF (VYM), which each have very low 0.06% expense ratios. Moreover, despite offering a monthly payout frequency — a nice feature — its trailing 12-month yield of 1.63% leaves much to be desired compared to peers. For instance, SCHD offers a yield well over 3% and VYM's is nearly 3%. On top of that, while DGRW does have an attractive long-term dividend growth track record, boasting a 10.92% CAGR over the past decade, this growth has been inconsistent, dropping sharply to a 4.87% CAGR over the past five years, a 6.48% CAGR over the past three years, and over the last 12 months, the dividend payout actually declined by 1.2%. This makes it a somewhat unreliable fund for investors seeking sustainable and high dividend growth rates. This inconsistency is particularly problematic given the already low dividend yield for the fund. A look at DGRW’s portfolio breakdown reveals why these inconsistencies exist. Approximately 30% of its portfolio is allocated to technology, with top holdings including Microsoft Corp., Apple Inc., and Broadcom Inc., and further down the list, Nvidia Corp. appears at number seven. These mega-cap tech stocks have seen strong performance recently due to the AI boom, but their dividend growth is often non-existent, inconsistent, or weak. This has likely contributed to the disconnect between strong total returns and relatively weak current dividend yields and erratic, weakening dividend growth rates. Better Options For Building A Dividend Snowball To improve DGRW from a dividend investor standpoint, it would likely be best to consider a different fund that has a lower expense ratio, higher dividend yield, and a more consistent dividend growth rate. Alternatives that we have already discussed earlier in this article like SCHD and VYM are good potential alternatives. Moreover, even for those seeking a more tech-heavy fund, alternatives like VIG would be preferable due to having a more consistent dividend growth rate and charging a much lower expense ratio. Moreover, DGRW’s sector diversification is also limited, with only 3.74% in energy, 2.4% in communication, 1.95% in basic materials, 0.25% in real estate, and just 0.19% in utilities. These sectors generally offer higher yields, and increasing exposure to them could create a more diversified and higher-yielding portfolio. Consider funds like the Energy Select Sector SPDR Fund (XLE) and the Alerian MLP ETF (AMLP) for energy, the Vanguard Real Estate ETF (VNQ) or the Cohen & Steers Quality Income Realty Fund, Inc. (RQI) for real estate, and the Utilities Select Sector SPDR Fund (XLU), the Cohen & Steers Infrastructure Fund, Inc. (UTF), or Reaves Utility Income Fund (UTG) for utilities. Each of these options provides an attractive dividend yield and could significantly enhance both sector allocation and overall dividend yield for the portfolio. Investors could also consider individual high-yielding blue-chip stocks from these sectors where DGRW is deficient to enhance the portfolio, such as Enterprise Products Partners (EPD) and Exxon Mobil (XOM) in the energy sector, AT&T (T) or Verizon (VZ) in the communication sector, Rio Tinto (RIO) in basic materials, Realty Income (O) or W.P. Carey (WPC) in real estate, and Brookfield Infrastructure Partners (BIP)(BIPC) or Brookfield Renewable Partners (BEP)(BEPC) in utilities. These stocks are all investment grade, have well-diversified asset portfolios and/or well-established business models, are relatively defensive, have attractive and well-covered dividend yields, and would improve DGRW's overall diversification without exposing investors to significant risk. Investor Takeaway  Overall, while DGRW has performed well on a total return basis in recent years due to its substantial mega-cap technology exposure, it falls short relative to other dividend growth funds in the areas of dividend yield, expense ratio, dividend growth consistency, and portfolio diversification. Consequently, we think dividend growth investors should pursue other funds instead. Even if DGRW remains a core holding in someone's portfolio for whatever reason, we think it is prudent for investors to round out their portfolios with some of the funds or individual stocks mentioned in this article to achieve a higher overall dividend yield and better-balanced portfolio allocation.","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":0},"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":"4.24.0","shortVersion":"4.24.0","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/2437553497"}