iShares Eyes Dividend Growth

08/29/2014 9:00 am EST

Focus: ETFs

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Dividend growth at iShares. In June, iShares unveiled its first ETF focused on dividend growth, which combines several dividend growth criteria into an intriguing package, notes Mark Salzinger, editor of The Investor’s ETF Report.

Among dividend-growth ETFs, iShares Core Dividend Growth (DGRO) actually implements one of the easiest standards. It tracks the Morningstar US Dividend Growth Index, which demands five years of annual dividend growth.

This allows DGRO to invest in companies that have more recently started growing their dividends but may also boast superior prospects for future growth. As a result, DGRO has the heaviest allocation to technology stocks (21% of its portfolio) of any broad dividend ETF.

To avoid stocks whose dividend growth is unsustainable, DGRO invests only in those whose dividend payout ratio (the percentage of earnings paid as dividends) is less than 75%.

Stocks must also have a positive earnings forecast for the coming fiscal year, which means, at the very least, that some of the dividend will be paid out of profits and not out of retained earnings and/or borrowed funds. And, DGRO does not consider any stock whose dividend yield is in the highest 10% of stocks.

This is intended to avoid distressed stocks with extremely high yields and likely forthcoming cuts or suspensions of dividends.

DGRO weights stocks according to total cash dividends paid, but limits each individual position to a maximum of 3%. Weighting by cash dividends gives DGRO a bias toward larger companies (its average market capitalization was recently $58 billion.

Meanwhile, the position-size limit should keep the portfolio from being too heavily weighted in any one sector. Consumer staples (about 21%) recently accounted for the greatest proportion of DGRO’s portfolio, followed by industrials (17%), technology (14%), consumer discretionary (13%), healthcare (10%), and energy (10%).

All sectors except telecommunications are represented in DGRO; each recently made up at least 4% of the portfolio. DGRO recently held 267 stocks. DGRO levies a 0.12% expense ratio, which is very low.

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