DGRO: Dividend Growth ETF Outperforms S&P500 With Less Risk, More Return

Dividends can be a powerful tool for achieving a growing income stream over time when the companies offering them are of high quality and offer long-term competitive returns in the general market. Dividends are not guaranteed returns and their payment it is a transfer of value from a company to its shareholders. However, any company that retains earnings must allocate its capital, and dividends are an indispensable way to achieve this.

The iShares Core Dividend Growth ETF (NYSEARCA:DGRO) offers a portfolio of 412 companies that has outperformed the S&P 500 over a ten-year period, while slightly underperforming the index over time horizons shorter than five years. Since almost all holdings are S&P 500 companies, DGRO is conceptually best thought of as a “Equal-Weighted S&P 500 Minus Non-Dividend Paying Fund”. Conceptually, this is an interesting thing investment approach because over long periods of time the methodology has outperformed the index with lower volatility and increased dividend yield.

At this stage of the bull market, DGRO is attractive because of its diversification and lower volatility compared to the market. The fund is extremely “vanilla” but is a great way for income-oriented investors to track the performance of the S&P 500.

DGRO has a trailing dividend yield of 2.26% versus 1.30% for the S&P 500 and a trailing P/E ratio of 21.4x versus 26.6x for the index. There is a subtle form of value investing that surprised me, as the vast majority of stocks in DGRO are included in the S&P 500. Plus, with a beta of 0.82 DGRO is significantly less volatile than the overall market.

I have long been intrigued by the low volatility anomaly, a statistical anomaly where the least volatile stocks in the market tend to outperform the most volatile stocks in the market. Therefore, DGRO appears to have a statistical advantage over the S&P 500 in terms of value, return and volatility.

DGRO’s top 15 holdings are shown below. These and all holdings that make up 1% or more of the portfolio are members of the S&P 500. There are some smaller holdings (AGCO, for example) that are mid-caps and not components of the S&P 500.

There are two other major differences: First, no single company accounts for more than 3.1% of the fund’s holdings. Four S&P 500 companies beat it: Apple ( AAPL ) at 7.04%, Microsoft ( MSFT ) at 6.52%, Nvidia ( NVDA ) at 6.15%, and Amazon ( AMZN ) at 3.35%. As a result, the fund is less concentrated in its main holdings.

The second difference is that a number of dividend payers are excluded, among the largest they include: Nvidia (NVDA) and Amazon (AMZN), but also Alphabet (GOOG, GOOGL), Meta (META), Berkshire Hathaway (BRK) . B) and Tesla (TSLA).

In addition, DGRO has a more balanced exposure to a large number of sectors compared to the S&P 500. It is overweight in several sectors compared to the S&P 500. Financials – 18.35% vs. 13.00%, health – 17.94% vs. 11.90%, industrial – 11.70% vs. 8.40% and energy 7.31% vs. 3.70%. This is offset by the fact that information technology is considerably underweight – 16.01% versus 31.40%.

If the tech rally continues, DGRO could be slightly left behind. However, performance over the past few years has been very competitive with the S&P 500. So the fund looks like a good compromise for investors who don’t want to miss out on the bull market but want to allocate with caution.

Since its inception 9 years ago, DGRO has steadily increased its payouts. Investing 9 years ago, the return was comparable to now. However, with the increase in share price and dividend growth, the cost yield would be around 5.5%. Over 5 years, DGRO has increased its dividend by 9.30% CAGR.

ConCluSIonS

DGRO is an intriguing fund because, while it mimics the performance of the S&P 500, it has deviated from it in ways that could beat the index while still delivering similar performance. Although excluding some of the higher priced growth names, the price per dollar of earnings is about 20% lower and the dividend income is over 70% higher per dollar invested. There is significantly less volatility and less concentration risk as no single company accounts for more than 3.1% of the fund. Because S&P 500 firms overweight this amount due to size, the average market capitalization of a firm in the fund is reduced.

In this way, DGRO takes advantage of several anomalies that can predict advantageous performance:

• Value Anomalies: Stocks with lower price/value tend to outperform stocks with higher price/value.
• Low Beta Anomalies: Lower beta stocks tend to outperform higher beta stocks.
• Dividend Anomalies: Stocks that pay dividends tend to outperform those that do not.
• Size Anomaly: Smaller firms tend to outperform larger firms.

With its 412 constituents, DGRO builds a portfolio that exhibits these advantageous characteristics while deviating from the S&P 500 index as little as possible. It is an excellent proxy for income investors who want to track the S&P 500, achieving a balance between diversification, dividend growth and capital appreciation.