Dividend growth stocks have shown to be significant investments, according to research by Hartford Funds and Ned Davis Research. Over the past 50 years, companies that consistently grew their dividends delivered higher total returns with less volatility compared to those that did not increase dividends, cut or eliminated payouts, or did not pay dividends at all.
A hypothetical $100 invested in S&P 500 dividend growth stocks in 1973 would have almost reached $15,874 by the end of 2024. In contrast, $100 invested in companies that did not increase dividends would have grown to only $2,983. Non-dividend payers would have offered a return of just $899, while dividend cutters or eliminators would see the initial $100 drop to $63.
Investing in dividend growth stocks can be an effective strategy, but managing such a portfolio can be challenging. Fortunately, several exchange-traded funds (ETFs) simplify this process. Notable options include the Vanguard Dividend Appreciation ETF (VIG) and the iShares Core Dividend Growth ETF (DGRO).
Each ETF tracks a different index measuring the performance of dividend growth stocks but includes unique selection criteria. The Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index, which includes U.S. companies that have increased dividends annually for the past decade, excluding the top 25% of highest-yielding companies. Currently, it consists of 338 companies.
On the other hand, the iShares Core Dividend Growth ETF tracks the Morningstar U.S. Dividend Growth Index, which includes companies with at least a five-year history of steady dividend growth and the capability to continue increasing dividends, excluding REITs and the top 10% highest-yielding stocks. This index currently comprises 408 companies.
Both funds avoid yield traps by excluding the highest-yield stocks. The funds aim to include companies most likely to increase dividends in the future. The top holdings in the Vanguard ETF include companies such as Broadcom and Microsoft, whereas the iShares ETF lists Microsoft and JPMorgan Chase among its top holdings.
The iShares fund has a higher dividend yield (2.3%) compared to Vanguard’s (1.8%), as it excludes only the top 10% highest-yielding stocks, unlike Vanguard’s exclusion of the top 25%.
In terms of fees, Vanguard recently reduced its expense ratio to 0.05%, cheaper than iShares’ 0.08%. This means lower management fees, which can accumulate significantly over time.
Looking at returns, although past performance is not a future guarantee, Vanguard has shown strong recent performance compared to the iShares fund, which slightly outperformed over a longer period.
Overall, both ETFs provide solid options for investors interested in dividend growth stocks. The iShares fund suits those seeking more immediate income due to its higher yield, while Vanguard offers a lower fee structure, potentially increasing net returns.
