DGRO: I Am Bearish Because Of The Opportunity Cost, Not The Fund Declining (Rating Downgrade)

seekingalpha06-30 21:00

The iShares Core Dividend Growth ETF has a low yield of 2.37% and has underperformed the S&P 500 with a 13.70% return.Despite appreciating in value, the opportunity cost of investing in DGRO compared ...

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Some investors enjoy building out a portfolio of individual equities, while others would rather invest in an ETF and take a hands-off approach. I love passive income, and since I have no interest in purchasing real estate to become a landlord, I believe that the equity market is the perfect fit for me. I am invested in many different income-producing assets, but I don't see how the iShares Core Dividend Growth ETF (NYSEARCA:DGRO) is attractive. For some, DGRO may check off the boxes of generating a growing dividend that has the ability to compound over time, but the yield is low at 2.37%, and the 13.70% return is subpar compared to the S&P 500. Over the past year, the SPDR S&P 500 ETF Trust (SPY) has appreciated by 24.75%, and it has a yield of 1.25%. I don't expect to beat the market when allocating capital toward income-producing investments, but the yield has to be worth it. When it comes to DGRO, the dividend yield and the dividend growth are just not enough to make up for underperforming the market or producing less income than other income-focused ETFs. While DGRO has amassed $27.11 billion in AUM, I think there are more enticing alternatives to achieve the objectives of generating income and dividend growth. Seeking Alpha Following up on my previous article about DGRO My previous article about DGRO (can be read here) was published on 1/25/23, and since then, shares of DGRO have appreciated by 14.17%, and the total return has been 18.41%. The S&P 500 has gained 37.10% over this period, which is around double the return of DGRO. I had discussed why there was less of a reason to invest in DGRO, and I am following up with a new article about why I am turning bearish on DGRO. This fund has achieved its objective of providing its investors with dividend growth while generating capital appreciation, but in my eyes, the opportunity cost has been too high. I will discuss why I am now bearish on DGRO compared to other alternatives. Seeking Alpha Risks to investing in DGRO DGRO is an interesting fund that tracks the US Dividend Growth Index from Morningstar. This provides a larger yield than S&P 500 index funds or total market funds, but it underperformed other funds and the S&P 500. The biggest risk in my eyes is the opportunity cost of investing in DGRO. The fund has trailed the market while offering investors a low yield. The trade-off of underperforming the market for the combination of DGRO's yield and dividend growth is a large risk because investors are shortchanging themselves in both appreciation and income. If the market continues to appreciate, DGRO will probably continue to climb higher, but investors are likely to continue seeing sub-par returns and less income than other alternatives hitting their accounts. Why I turned bearish on DGRO, despite the fact it's appreciated in value Just because I am now bearish on DGRO doesn't mean that I believe its shares will decline in value. I believe the market will continue higher as big tech expands their earnings. DGRO has Microsoft (MSFT), Apple (AAPL), and Broadcom (AVGO) in their top-10 holdings, with 17.42% of the funds allocated toward technology. From a capital appreciation perspective, I believe DGRO will follow the market higher. From an opportunity cost perspective, DGRO doesn't make sense from an income perspective, a dividend growth perspective, or because of its ability to outperform its peers in appreciation. I am going to compare DGRO to 3 different funds and outline why its strategy doesn't work for me. Seeking Alpha DGRO invests in companies that have achieved 5-years of sequential dividend growth while paying out less than 75% of their earnings through the dividend. This has helped DGRO maintain a growing dividend because the companies within its holdings have the ability to grow their earnings and provide annualized increases because the dividend never represents more than 75% of their profitability. DGRO focuses 80% of its assets to the companies that make up the US Dividend Growth Index from Morningstar, while the remaining 20% can be utilized for other investments that include futures, options, and swap contracts. Due to DGRO's construction, I will compare it to SPY, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), and the Schwab U.S. Dividend Equity ETF (SCHD). I selected these funds because they offer an alternative to funds structured around appreciation, utilizing options, and dividend growth. Based on an overall combination of appreciation and dividend yield, I would rather invest in an S&P 500 index fund such as SPY. Over the past year, SPY has appreciated by 24.71% and paid a dividend of $6.84, which is a 1.25% yield over the trailing twelve months (TTM). Since 2020, SPY has grown its dividend by $0.94 or 16.57%. DGRO, on the other hand, has appreciated by 13.70% over the past year and paid a dividend of $1.36 over the TTM, which is a 2.37% yield. DGRO just doesn't make sense to invest in dividend growth when the yield is 1.12% higher than the yield of SPY, and it's trailing SPY by 11.01% over the past year. While DGRO hasn't provided a negative return, there is too much appreciation left on the table to justify the low yield. SCHD is an income-focused fund centered on generating a higher yield from equities. DGRO has outperformed SCHD by 4.98% over the past year, but if the emphasis is on the dividend and the amount of YoY dividend growth generated, then DGRO becomes less attractive. From the end of 2020 through 2023, DGRO has grown the dividend by $0.29, which is 27.92%, as the dividend increased from $1.03 to $1.32. Over the same period, SCHD has raised its dividend by $0.63, which is 31.04% as it's increased from $2.03 to $2.66. SCHD has a TTM dividend yield of 3.66%, which is 1.29% larger than that of DGRO. If I am looking for dividend growth from equities, I would lean toward SCHD over DGRO because I am getting a larger yield and more dividend growth from the investment, and if that's the focus, I would be willing to give up the 4.98% in appreciation. Steven Fiorillo, Seeking Alpha The fact that DGRO allows up to 20% of its assets to be utilized for options, futures, or swaps, yet its yield is less than 3% is disappointing. I am also comparing DGRO to JEPQ because JEPQ is a hybrid fund that utilizes 20% of its assets for exchange linked notes (ELN), and it utilizes an option overlay strategy to generate income. JEPQ has appreciated by 15.87% over the past year, which is 2.17% more than DGRO. JEPQ has also paid out $4.86 in monthly distributions, which is an 8.75% yield. For a fund that is allowed to utilize an option strategy, DGRO isn't even coming close to SCHD's dividend yield and is getting left in the dust by JEPQ. If I want to invest in a hybrid fund that can outpace the risk-free rate of return on the yield and provide modest appreciation, JEPQ outshines DGRO in both categories. Seeking Alpha Conclusion  I am bearish on DGRO because it's not outperforming alternative investments in appreciation or yield. As an investor who is always looking for income investments, DGRO doesn't offer me anything special. Its yield is low, its dividend growth is minimal, and its appreciation doesn't come close to matching the market. I happen to like the idea of what DGRO is looking to achieve, but I wouldn't be interested in adding DGRO to my portfolio unless its yield was above 4%. If I am focusing on dividend growth, I would rather invest in SCHD because of the larger yield and dividend growth, and if I want a hybrid fund, my preference would be JEPQ because it utilizes an option strategy to exceed an 8% yield while outperforming DGRO on appreciation. I like the companies that are in DGRO's holdings, but their results aren't exciting, and until something changes, I will remain bearish on this ETF.","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/2447960304"}