An ETF That Takes Investors To Dividend Growth

May 16, 2016 3:53 pm
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An ETF That Takes Investors To Dividend Growth

Tumbling Treasury yields and a sanguine interest rate environment have reinvigorated investors' thirst for high-yield sectors and asset classes. While now appears to be the time to be embracing high dividend stocks and the relevant exchange-traded funds, investors may want to consider a different approach and give dividend growers a look.

Dividend Growth With DGRO

The iShares Core Dividend Growth ETF (iShares Trust (NYSE: DGRO)) is an ETF income investors can use to gain access to stocks with potent dividend growth potential.

DGRO follows the Morningstar US Dividend Growth Index, which requires constituent firms have a minimum of five years of uninterrupted dividend growth. The index also purposefully avoids stocks with high and potentially unsustainable dividend yields by excluding firms with yields that rank in the top 10 percent of the eligible inclusion universe and only companies with a payout ratio of less than 75 percent can be included, according to Morningstar.

Related Link: A Nifty Dividend Growth ETF

Other Pluses For DGRO

Beyond the obvious, there are other advantages to dividend growth stocks, including these stocks can be less volatile and more attractively valued than their non-payout growth counterparts. In other words, while many investors think they are a getting a good deal with high-yielding consumer staples and utilities names, they are likely paying up to play defense while other dividend growth sectors may be more attractively valued.

Consumer staples is DGRO's largest sector allocation at 15.7 percent, but utilities represent just 5.1 percent of the ETF's lineup, or the second-smallest sector allocation in the fund. Industrial, financial services and healthcare names all command weights of over 14 percent.

“There are some conditions — and clear distinctions — that may set dividend growers apart from other dividend stocks in today’s market, particularly their attractive valuations, stable earnings and stronger balance sheets,” said BlackRock in a recent note.

None of DGRO's 430 holdings garner weights above 3.13 percent. Top 10 holdings include Dow components Exxon Mobil Corporation (NYSE: XOM), Pfizer Inc. (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ).

As interest rate normalize, dividend investors should turn to lower yielding sectors with room for dividend increases in the coming years while skirting groups that have been home to negative dividend action or are vulnerable to higher rates. On that note, dividend offenders energy and materials names combine for just over 10 percent of DGRO's weight while utilities chime in at 5.1 percent. Those are the ETF's three smallest sector allocations.

Disclosure: Todd Shriber owns shares of JNJ.

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