DGRO: Chasing The Wrong Dividend Growth

seekingalpha05-31

iShares Core Dividend Growth ETF underperforms the key S&P 500 index due to selecting overvalued and slow-growing dividend stocks.DGRO focuses on stocks with a history of growing dividends, but fails ...

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href=https://seekingalpha.com/article/4696693-dgro-chasing-the-wrong-dividend-growth><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>iShares Core Dividend Growth ETF underperforms the key S&P 500 index due to selecting overvalued and slow-growing dividend stocks.DGRO focuses on stocks with a history of growing dividends, but fails ...</p>\n\n<a href=\"https://seekingalpha.com/article/4696693-dgro-chasing-the-wrong-dividend-growth\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"AMD","symbol_name":"美国超微公司","start_time":0,"source_url":"https://seekingalpha.com/article/4696693-dgro-chasing-the-wrong-dividend-growth","article_id":"2439998609","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1809528162/image_1809528162.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2439998609","pubTimestamp":1717155369,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"iShares Core Dividend Growth ETF underperforms the key S&P 500 index due to selecting overvalued and slow-growing dividend stocks.DGRO focuses on stocks with a history of growing dividends, but fails 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stocks. iShares Core Dividend Growth ETF (NYSEARCA:DGRO) is another prime example of investors chasing a hot concept to end up with results underperforming the major index. My investment thesis is Bearish on the dividend growth ETF due to the fund piling into overvalued and slow-growing dividend stocks. Source: Finviz Index Target Problems The Core Dividend Growth ETF has a goal of tracking the investment results of an index comprised of U.S. equities with a history of consistently growing dividends. The biggest notable issue is that the ETF has no goal of paying attractive prices for dividend growing stocks, or considering more volatile dividends now becoming in vogue. The fund has top holdings like Apple (AAPL), Microsoft (MSFT) and Exxon Mobil (XOM). The dividend index is primarily made up of the top tech, energy and biopharma dividend paying stocks. Notably missing from the top weighted stocks are the hot GLP-1 biopharmas, though 4 biopharma stocks exist in the top 10 holdings. Source: iShares Eli Lilly (LLY) is up over 600% in the last 5 years due to the weight loss drug approval. The biopharma paid a strong dividend in 2019 when the yield was a solid 2.5%, but the stock still only accounts for a 1% weight in the ETF. On the flip side, DGRO owns both Apple and Microsoft that hardly have growth to justify the current stock prices. Microsoft is an interesting AI play with the generative AI investment in OpenAI and incorporation of such functionality into core services, but the stock only has a dividend yield of 0.7%. An investor seeking dividends isn't likely interested in a large tech stock trading at 32x forward EPS targets while offering a meager dividend. Sure, the dividend is growing at a solid clip, but the stock price already factors in years of fast growth, making the stock a risky play. The ETF only has a dividend yield in the 2.4% range, while the P/E ratio sits at over 20x. The fund assumes the worst characteristics of the overall stock market. The prime issue with the dividend growth concept is that corporations are now encouraged to hike dividends annually to become a dividend aristocrat. An investor in the divided growth concept should want corporations hiking dividends due to earnings and cash flow growth, not to meet a dividend growth agenda. In addition, several companies in volatile sectors, such as the commodity sector, are adjusting dividend payouts based on the profits of the business. In this manner, a company doesn't keep paying a quarterly dividend unsupported by the current commodity price of oil or copper to prevent financial distress when commodity prices are low and to eliminate the dramatic dividend cuts of the past. Freeport-McMoRan (FCX) is a prime example of a company that went to variable dividends to prevent the company from cash crunches when copper prices slumped and eliminate the need to cut dividends. The company has a fixed dividend combined with a flexible variable dividend and investors have been rewarded with riding the wave. Data by YCharts The stock has soared as the fixed dividend has grown over time from a $0.05 quarterly fixed dividend to a combined $0.15 fixed plus variable dividend. The payout has tripled in the last few years, yet the dividend growth portfolios don't include Freeport-McMoRan due to the lack of consistent dividend hikes. Underperformance As A Goal DGRO was launched in 2014 and the performance of the fund has increasingly lagged the market by a larger amount. The gap has become nearly 40 percentage points in the last couple of years. Source: Seeking Alpha The ETF lists 424 stocks, now making the fund a quasi S&P 500 index that underperforms the actual S&P 500. The fund has missed the growth of chip stocks like Nvidia (NVDA) and AMD (AMD) over the decade of being an active ETF, along with a lot of the Magnificent 7 stocks that don't pay dividends. Again, this is where the fund is designed to not capture growing companies with strong profits and cash flows, but just the portion willing to pay dividends. The S&P 500 stocks continue to spend an increasing amount of money on stock buybacks due to the issues facing stocks like Freeport-McMoRan with cyclical earnings and tech stocks like Google (GOOG, GOOGL) that viewed the stock as cheap and used excessive cash to repurchase shares until the recent dividend announcement with the market cap already topping $2 trillion. S&P 500 companies currently spend far more on share buybacks than dividends. Q4'23 buybacks were $211 billion, while dividend payouts are only ~$160 billion per quarter. Source: S&P Dow Jones In essence, investors focused on dividend growth stocks alone are missing nearly 60% of capital returns to shareholders. The DGRO ETF picks stocks based on only a fraction of the decision tree on whether the corporation is growing cash flows, and the stock buyback is the portion of the equation indicating where true value exists. Takeaway  The key investor takeaway is that dividend growth investing appears too focused on short-term dividend payout decisions my management teams gaming the system. The iShares Core Dividend Growth ETF is another fund too focused on the wrong metrics for selecting stocks, leading to under performance of the S&P 500 at an increasing rate. The ETF has generated decent performance over the last decade due to the bull market, but investors would be better off just owning the S&P 500 with returns due to not excluding great stocks.","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/2439998609"}