Three ETFs for Dividend Growth

11/15/2016 9:00 am EST

Focus: ETFs

David Fabian

Managing Partner, FMD Capital Management

The chase for yield over the last half decade has created lofty valuations in high dividend-paying stocks relative to other opportunities with potentially more attractive qualities, suggests David Fabian, editor of The Flexible Growth & Income Report

There are a variety of ways that investors can mitigate this myopic focus. One option is to consider is adding a factor-based strategy such as dividend growth characteristics.

These stocks are focused on modestly increasing their dividend payments year after year regardless of exogenous factors.

There are stocks in this category that have been doing this for decades and have strong balance sheets to prove it. The current yields may not have the same eye-popping statistics as their peers. 

However, there is a case to be made for the variant exposure these indexes can provide to complement a diversified income portfolio.

By far the largest exchange-traded fund in this category is the Vanguard Dividend Appreciation ETF (VIG), which has over $21 billion in total assets. 

This ETF tracks a basket of 185 large-cap stocks with a history of annual dividend increases. It’s also worth noting that the consumer staples and industrial sectors represent 46% of the total exposure in VIG.

VIG charges a measly 0.09% annually to access this portfolio and the current 30-day yield is listed at 2.17%.

Another top example of this strategy is the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). This fund has $2.4 billion dedicated to a small group of just 40 large-cap stocks from the S&P 500 Index.

Each of these stocks has raised its dividends for at least 25 consecutive years. Each underlying company is equal weighted with a similar distribution of capital.

For those who want a somewhat more diverse approach, the iShares Core Dividend Growth ETF (DGRO) or WisdomTree Quality Dividend Growth Fund (DGRW) may be appealing. 

DGRO owns over 400 stocks across multiple sector and market capitalizations, while DGRW is home to 285 U.S. companies. 

It’s worth noting that DGRW considers earnings growth as a quality screen and weights its constituents according to their dividend payouts.

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By David Fabian, editor of The Flexible Growth & Income Report

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