CGDG: A Must-See ETF For Retirement Planning Or Wealth Generation

The Capital Group Dividend Growers ETF (NYSEARCA:CGDG) is my next pick in the top American Funds ETFs that I’ve been covering recently. While the first one on (CGBL) presents a balanced investment in stocks and bonds with a very compelling case, the second one covering international investments (CGIE) represents a sensible geographic diversification into large-cap European securities focused on growth. For this next analysis, I’ve chosen one that might appeal to dividend growth investors, because I believe it comprises a considerable portion of the community of long-term investors.

About CGDG

CGDG is only about a year old, having been incepted on 9/26/2023. It was launched alongside several other ETFs in the American Funds family under the Capital Group brand, which is nearly a century old. In 2022, the group started launching the first of its “transparent ETFs”, which essentially means a tighter bid/ask spread because holdings are disclosed on a daily basis. Another feature of these funds is that they take direct ownership of overseas stocks, eliminating the need to buy ADRs. The reason that’s better is that ADRs come with additional risks such as currency risks, lack of voting rights, higher costs, and trading hours being restricted to U.S. market hours (as opposed to having live trading data when directly investing in overseas-domiciled securities.)

This $1.2 billion ETF comes with a dividend yield of 1.5% (forward basis; 30-day SEC yield is ~3%), which might seem low for a dividend-focused ETF, but only until you see the impressive 25% return since inception and put it in that context. The aim here, though, is dividend growth, so what it’s designed to give investors exposure to the power of compounding through sustained dividend growth over several years, and we’ll see that as we review some of its top holdings.

The fund has an expense ratio of 0.47%, which is right below the ETF sector median of 0.49%. Some might consider that a little expensive, but when you look at the total return it’s managed to deliver when compared to more passive options, I’d say it’s well worth the value.

CGDG’s Sectoral Allocations

The fund holds about 85 to 90 securities at any time, with around 19% in technology, 18% in industrials, and 14% in financials, totaling roughly half the holdings. I like this type of diversification among the top sectors because they tend to complement each other in different economic cycles.

As an example, over the past year and a half when interest rates have remained at high levels, industrials have underperformed financials, which makes sense because the cost of capital is high, but financial institutions generally tend to benefit from higher interest income. Tech’s performance, of course, is not representative of its sector because the Magnificent 7 have been contributing to much of the sector’s performance during that period.

So, what we essentially have here is a bull run on tech, which is an outlier because of the Mag 7’s significant influence on the entire sector, but a clear distinction between financials and industrial.

The overall result for the ETF has been positive, which is why CGDG has an impressive price return of 11.5% in the YTD period. That’s not market-beating, of course, but what we’re more interested in with this fund is how well it’s able to preserve and grow its NAV. That’s held up really well, and if you add dividends on top of it, that return goes up to nearly 13%. That’s a very reasonable return on an instrument intended to focus on a growing dividend base.

Yes, it could have been better, but I like the fact that the fund’s portfolio managers are being prudent about their investments and not trying to chase high yield or high capital growth just to beat the market. Doing that would unnecessarily lead to an elevated risk profile, and that’s not what dividend growth investors want; they’re looking for slow and steady rather than fast and volatile.

That brings us to the next question.

Can CGDG Deliver the Goods?

There are four things we need to look at with regard to its holdings – forward yield, dividend safety and sustainability, dividend growth, and capital preservation and appreciation.

Against these benchmark items, as it were, let’s look at how some of the ETF’s top holdings fare. We can use a comparison table to reference these items as we assess them one by one.

Dividend Yield

Although the forward yields on these top seven securities seem to be supported by just a couple of stocks in the consumer staples and real estate sectors, I’d like to draw your attention to the 4-year average yields. The fact that they’re considerably higher almost across the board indicates one of two things – either the prices of these stocks have appreciated considerably in that time, or there have been some dividend cuts.

A quick look revealed that (TSM) had one div cut in 2022, and (SAP) had one that same year but it was more than offset by a special dividend. Other than that, I don’t see any other cuts that would explain the drop in yields, which only leaves price appreciation. And that’s a definite positive because it ties into capital preservation.

Another way to look at this is the YoC, or Yield on Cost, which is essentially the true nominal yield on a security’s cost basis. Over that same four-year period, the lowest YoC comes from SAP at 1.5%, but the majority of these stocks are yielding upwards of 4% and all the way above 7%, the latter being (VICI), which is understandable because it’s a REIT, and it also has the highest forward yield at 5.2%.

That leads to the conclusion that forward yields appear deceptively low because of the price appreciation across the board, and that’s easily validated with a price return chart, even if you look at the past year alone.

Putting it all together, I’d say that despite the apparently low yield, the quality of that yield is really solid, because (although I wouldn’t recommend it) you can sell off a portion of your ETF holdings whenever you need the extra cash. From that viewpoint, this is not a bad investment for investors looking for a reasonable yield, with the option of liquidating when needed.

Dividend Safety and Sustainability

The payout ratio is a good metric to assess these elements, and I like what I see across the board, except for (PM). Philip Morris, however, has managed to bring down its payout ratio from the low 90s to the mid 80s as a percentage of adjusted net income, and it seems to be holding relatively steady at that level.

As for the other top seven holdings, we see a range of between 8% on the low side from (TSM) to about 65% at the upper end, from… you guessed it – VICI!

Another couple of metrics I like to look at for dividend sustainability as well as stability are a) the number of consecutive years of dividend payouts, and b) the number of consecutive years of growth. I’ll discuss the second one in the next sub-section, but when I look at the seven holdings and how long they’ve been paying dividends, I like what I see.

(AVGO) – 13 years of consecutive payouts

(TSM) – 19 years

(PM) – 15 years

(RTX) – 34 years

(VICI) – 5 years

(SAP) – 26 years

(UNH) – 21 years

These figures from the top seven holdings of CGDG tell me that the dividends are largely safe, and there’s adequate bottom-line profitability to keep the payouts coming for the foreseeable future.

Dividend Growth

Two metrics I’d like to look at for this benchmark item are the historical growth percentages and, as I mentioned above, the consecutive years of dividend growth. On that front as well, what I see is a lot of potential to keep increasing the payouts.

We touched on historical growth briefly, but what I’d like to highlight in this sub-section is the fact that the majority of these companies in the top seven kept increasing their dividends right through the pandemic, with some like RTX and PM even managing to keep them growing through or right after the GFC. That’s no small feat considering the sheer number of bankruptcies filed by U.S. entities between 2010 and 2024 (as of June 30).

This shows the resilience of CGDG’s top picks, and is one of the reasons I like this ETF. The strategy is sound and based on fundamental strength identified by the portfolio managers rather than being dependent on an unemotional algorithm that only crunches numbers in an objective manner. Of course, there’s some merit to an algorithmic, objective approach, but at the end of the day, I’m willing to bet that most investors would want their money managed by experienced humans, even if they’re using technology to enhance their decision-making skills.

And so we see that dividend growth and growth streak are both strong with this ETF’s top holdings, which should give you confidence as a dividend growth investor.

Capital Preservation and Appreciation

The final benchmark item I’d like to study is how well an investment in CGDG has done over the life of the ETF. We’ve already seen the impressive price and total return figures since inception; now, let’s look at how it’s led to AUM growth. The assumption here is that cumulative inflow and outflow volume differences tell us how the assets under management are growing (or not) over time. One of the most effective measures of this, in my opinion, is On Balance Volume, or OBV.

OBV is essentially a volume-based technical indicator that tells investors several things, among which is the net volume on up days vs down days. One thing to note here is that we’re using market price rather than NAV, but since the premium or discount to NAV oscillates in a relatively tight band, I’m using market price as a proxy for NAV.

With that in mind, let’s look at what OBV has been like since the fund’s inception.

We see net outflows during the early months of the fund’s existence, and that’s understandable because even ETFs like (SPY) that are so massive now struggled to gain the confidence of investors in their early days (see below).

On balance, pardon the pun, it seems like fund inflows for CGDG have been getting stronger since July, and that’s a definite positive because the sheer number of ETFs available today make it hard for any single fund to stand out and be noticed by the investment community at large. But American Funds being a notable name in the mutual fund space for over 90 years, it’s easy to see why CGDG rapidly gained an investor following, and I believe that following is going to be very ‘sticky’ moving forward.

The reason I think it’ll be sticky is that this is not an ETF that you want to hold for a short time. Dividend growth investors know that patience is the key, so they generally have a very long investment horizon.

As an example, Microsoft Corporation’s (MSFT) YoC would be an impressive 6.3% for anyone who’s been holding it for the last ten years. Who wouldn’t want to own a quality stock like MSFT that also pays a handsome dividend?

Similarly, with an ETF like CGDG, I don’t expect OBV to suddenly drop; rather, as the fund gets the attention of more investors, those inflows are only going to grow. How does that benefit an investor? It’s simple: the greater the AUM (in general), the greater the liquidity of the shares, which allows investors to initiate larger and larger positions over time and/or allows more investors to participate – and there’s your capital preservation and appreciation in action!

I genuinely see this fund growing its AUM at a rapid pace as we enter a very volatile market environment that demands risk control. Moreover, over the next several years, America expects to see a surge in the retiree population (people turning 65.) Here’s a scary statistic (emphasis mine):

America is entering a historic surge, with more than 4.1 million Americans retiring each year through 2027. What used to be 10,000 over the past decade is now over 11,200 every day. A concerning trend is emerging as a significant portion of the Peak 65® generation lacks sufficient protected income, putting them at risk of outliving their savings.

That means it’s becoming increasingly urgent and important to not only protect your life savings, but also put it in an investment that can keep growing distributions over time and simultaneously keep growing your capital.

From that perspective, you can immediately see why an ETF like CGDG would be immensely attractive to anyone approaching retirement age, or even someone younger that wants to safeguard their financial future.

A Couple of Closing Thoughts

The risks that are associated with this ETF are quite minimal and largely offset by how well the fund is being managed. It did have a high turnover of 20% in the YTD period, that’s rapidly dropped down to about 3% now, as it should. It would have taken a while to filter out the noise in the initial holdings, but it looks like the portfolio managers are fairly happy with the current composition, so I don’t see the turnover suddenly increasing again to a significant degree. Some rebalancing is always needed from time to time, but I think the fund has narrowed it down to the best 80 to 90 picks.

The biggest risk right now is the economy spiraling quickly into a hard landing, so I’d recommend investing a portion of your funds into long-term treasuries (10, 20, or 30 years). The coupons are high enough to make them more sensitive to interest rate cuts (because effective duration would be higher than otherwise), so it might be a good idea to take advantage of that ahead of a possible recession – depending on what you think is the likelihood of that happening. Assuming the worst, your bonds will appreciate significantly, giving you the option of either capturing that premium by selling them prior to maturity or continuing to enjoy what could then be a much higher coupon compared to interest rates on newer issues.

Coming back to the fund, you’ve probably guessed at my Strong Buy recommendation for CGDG, but I’d like to clarify that this type of investment is not necessarily just for those approaching retirement. If you’re in your 20s or 30s, investing in such a basket of securities could grow your wealth tremendously over the next 30, 40, or 50 years, and time and compounding suddenly become your best friends forever. If you’re in your golden years, though, this kind of ETF becomes more of a necessity in order to protect your capital, grow it, and still enjoy a regular income without dipping into your savings or having to sell off your other assets.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.