Choosing the Best Dividend Growth ETFs

If dividend growth investing is something that you are interested in, then dividend growth ETFs may be a good choice for you. This is especially true if you lack the time to research and invest directly in stocks. The number of dividend growth ETFs continues to grow each year giving investors a reasonably large selection. That said, this presents its own challenge as how to distinguish and differentiate between dividend growth ETFs. 

Different dividend growth ETFs will have some similarities, but they are not all the same. The main reason for this is that the underlying indices are different. This leads to different dividend growth ETFs owning a different number of sectors and stocks. ETFs also weight the stocks and sectors differently. There may also be other differences such as in the yield or expense ratio.

Criteria for the Best Dividend Growth ETFs

Many other lists of best dividend growth ETFs catalog almost every single one that is available. However, it is useful to analyze the different dividend growth ETFs to select between them. But what metrics are important?

One metric that I think is important is the expense ratio also known as the ER. In general, you want the ER to be as low as possible when investing in dividend growth ETFs. As stated above, expense ratios will subtract from your total returns and this effect will increase over time if you are going to own dividend growth ETFs for a long period of time.

The next metric to consider is distribution yield. Most dividend growth ETFs have moderate yields. If you are seeking high income than a dividend growth ETF is probably not for you.

The third metric to analyze is total assets. An ETF with greater assets is more liquid and has a lower chance of closing or being merged with another ETF. Additionally, ETFs with more assets tend to be older and have a longer established history, which is a plus in my opinion.

The last metric to consider is diversification. You can examine this from the context of number of holdings and also number of sectors. There are 11 sectors, which are Communications, Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Technology, Materials, Real Estate, and Utilities. Not all dividend growth ETFs own stocks in all 11 sectors. Diversification is important to reduce volatility. Most dividend growth ETFs own dozens to hundreds of stocks across 9 or more sectors and are adequately diversified.

Comparative Analysis

Comparing and analyzing the dividend growth ETFs in our list by our criteria results in the table below. I have excluded ETFs with less than $500 million in total assets and also with a history of less than five years. There are 8 remaining ETFs on the list including three very popular ones and two with very low expense ratios.

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We can also look at diversification of these 8 ETFs based on percentage of assets in each sector. It is clear from these percentages that they are not all the same. Indeed, some are very different in their investment focus. Some of these differences can be attributed to differences in the underlying indices.

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However, all 8 of the dividend growth ETFs in this table deemphasize the Energy and Real Estate sectors. This could be because of the large number of dividend cuts and suspensions during the COVID-19 pandemic and exclusion of real estate investment trusts or REITs. These two sectors suffered a disproportionate number of dividend cuts and suspensions during the pandemic. Hence, equities in these sectors probably do not meet the minimum number of years for dividend growth in most indices.

Based on the data and criteria in the above tables, it is clear that three ETFs standout as the best dividend growth ETFs for 2021. These three ETFs are VIG, DGRO, and SDY. I include both VIG and DGRO because of their low expense ratios, high dollar value of assets, and long history. I include SDY because of high dollar value of assets and long history. The expense ratio is a bit higher. All three have an acceptable level of diversification. Now let’s take a look at the top 3 ETFs.

VIG – Vanguard Dividend Appreciation ETF

VIG tracks the NASDAQ US Dividend Achievers Index. The fund invests primarily in common stocks of U.S. companies that pay growing dividends. The NASDAQ US Dividend Achievers Index is a modified market-capitalization-weighted index that is focused on stocks that have increased the dividend for at least ten consecutive years. This largely corresponds to the Dividend Contenders and above.

As seen in the tables above over 50% of the holdings are from the Industrials, Consumer Discretionary, and Health Care sectors. Many stocks in these sectors are Dividend Contenders and therefore meet the 10-year criterion for dividend growth. But the ETF has exposure to six other sectors as well. 

The expense ratio is very low at 0.06% and the asset base is a whopping $74.8 billion making VIG simultaneously the cheapest and largest dividend growth ETF. I personally like the fund and have invested in it.

The top 10 holdings as of this writing are Microsoft (MSFT), Johnson & Johnson (JNJ), J.P. Morgan Chase (JPM), Walmart (WMT), Visa (V), UnitedHealth Group (UNH), Home Depot (HD), Procter & Gamble (PG), Comcast (CMCSA), and Oracle (ORCL). The top 10 stocks make up approximately 31.5% of total net assets.

DGRO – iShares Core Dividend Growth ETF

XEI tracks the Morningstar US Dividend Growth Index. The fund buys stocks that have a history of sustained dividend growth and that are broadly diversified across industries. The Morningstar US Dividend Growth Index consists of stocks that pay qualified dividends, have increased the dividend for at least 5 uninterrupted years, and have a significant margin to continue growing their dividend. This makes the universe of stocks larger and mostly corresponds to the Dividend Challengers and above.

The table above illustrates that the fund has large exposure to Information Technology, Health Care, and Financials sectors. Combined these three sectors make up over 55% of total assets. But the ETF has exposure to a total of 10 sectors. The expense ratio is low at 0.08% and the asset base is a little over $20 billion making the fund the second cheapest and second largest ETF at the same time.

The top 10 holdings as of this writing are Microsoft (MSFT), Apple (AAPL), Pfizer (PFE), Johnson & Johnson (JNJ), Procter & Gamble (PG), J.P. Morgan Chase (JPM), Verizon Communications (VZ), Home Depot (HD), Merck (MRK), and Cisco Systems (CSCO). The top 10 stocks make up about 27.2% of total net assets.

SDY – SPDR S&P Dividend ETF

SDY tracks the S&P High Yield Dividend Aristocrats Index. The fund buys stocks that generally correspond to the index and looks for companies that have consistently increased their dividend for at least 20 years in a row. The S&P High Yield Dividend Aristocrats Index consists of stocks that are in the S&P Composite 1500 and have increased their dividend for at least 20 consecutive years. Additionally, the market cap must be at least $2 billion and there is a minimum average daily trading value of at least $5 million.

The table above illustrates that the fund has large exposure to Financials, Consumer Staples, and Industrials sectors. These three sectors make up over 45% of total assets. But the ETF has exposure to all 11 sectors. The expense ratio is reasonably low at 0.35% but could be lower in my opinion. The asset base is over $19 billion making it the third largest dividend growth fund. Notably, this fund has the highest distribution yield of the 8 ETFs examined.

The top 10 holdings are AT&T (T), Exxon Mobil (XOM), Chevron (CVX), AbbVie (ABBV), Amcor PLC (AMCR), People’s United Financial (PBCT), South Jersey Industries (SJI), International Business Machines (IBM), Consolidated Edison (ED), Realty Income (O). The top 10 stocks make up about 19.6% of total net assets.

Final Thoughts on the Best Dividend Growth ETFs

There are many dividend growth ETFs, and the numbers continue to grow each year. As you can see from the analysis and discussion above these ETFs come in different flavors. They vary in the sectors and stocks that they invest in and the underlying indices. A larger number than the eight analyzed here exist but many are very small ETFs with assets in the tens or a few hundred million dollars. 

I personally tried to steer clear of those since they often lack sufficient history to judge their performance through different market cycles. Three of the ETFs in this list have been through both the Great Recession and the COVID-19 pandemic so are reasonably well tested. The largest and lowest cost dividend growth ETF is VIG, which is not surprising considering its pedigree. But it is not the only choice. This article should help you narrow your selection but do your research and know what you are buying.