iShares, BlackRock’s exchange traded funds unit, recently expanded its fairly-successful core suite of ETFs to help long-term investors keep more of what they earn. The world’s largest issuer of ETFs added 10 new funds to its Core suite of products to take its ‘broad and cheap’ approach one step further and added investment strategies such as value, growth and dividends to the mix.
One of those new funds, the iShares Core Dividend Growth ETF (DGRO), will compete in an already crowded income-seeking segment that is also gaining popularity because it focuses on dividend growth.
The investment strategy of DGRO is simple, yet powerful; it has a dividend increase streak requirement that is used to screen potential constituents from the universe of dividend paying stocks. This strategy implies companies that continually increase their dividend payouts will ensure bigger long term returns.
DGRO tracks the Morningstar US Dividend Growth Index that mandates sustainable growth for quality companies and five consecutive years of raised dividends. The strategy is not to aim for high current yield, but a growing one.
The five-year horizon compares with well-established rivals like the 10-year horizon for Vanguard Dividend Appreciation Fund (VIG) and 25 years for the SPDR S&P Dividend ETF (SDY) because it allows for inclusion of sectors that have a more recent history of dividend payment, such as technology.
The underlying index only includes companies that have a positive earnings forecast and have a payout ratio below 75 percent. Firms that have executed share repurchase in the past 12 months and have not cut dividends are also included in the index. Additionally, the dividend yield of a DGRO constituent can not be featured in the top 10 percent of the selection universe of the underlying Morningstar index.
The fund’s top-10 holdings include blue-chip Dow components like Chevron Corp, Exxon Mobil, Johnson & Johnson and Coca-Cola. It’s predictably tilted toward industrials and consumer staples with both the sectors cornering about 35 percent of total allocations.
Technology and financial services together get a little over 18 percent of total allocation although these two sectors have led dividend growth in the S&P 500 over the past several years.
DGRO has an annual expense ratio of 0.12 percent.
Disclosure: No holdings