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Best Dividend Growth ETFs

Some small investors following a dividend growth strategy prefer investing directly in stocks. The advantages of dividend growth investing are many. But other investors do not want to invest directly in stocks and prefer investing in exchange-traded funds (ETFs). However, it is possible to own dividend growth stocks by purchasing ETFs. We discuss the best dividend growth ETFs for these investors.

In the debate between ETFs vs. stocks, benefits and risks exist for both. However, ETFs have a significant pro with instant diversification, an attractive feature to many investors. Moreover, expense ratios are meager for many ETFs from Vanguard or BlackRock, the two largest ETF asset managers. Also, ETFs are simpler in many cases because they require less research effort to build a diversified portfolio. Consequently, dividend growth ETFs may be the best choice for some investors.

Best Dividend Growth ETFs
Best Dividend Growth ETFs

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What is an ETF?

An ETF is an investment fund composed of a large pool of investments like stocks or bonds. ETFs are relatively new investment products compared to stocks, having been available since 1993 in the United States.

It is essentially a cross between a passive index mutual fund and a traded stock. An ETF focused on stocks is a type of security that tracks an index of stocks. Other ETFs can track a sector (such as energy stock ETFs), industry (like infrastructure ETFs), commodity, currency, or investment strategy. 

However, the primary difference in comparing an ETF vs. an index fund or an ETF vs. a mutual fund is that an ETF can be bought and sold on an exchange like a stock while the market is open. Mutual funds trade once per day after the market closes. Since an ETF can be bought and sold throughout the day, its share price fluctuates much like a stock, which differs from a mutual fund. 

Like a mutual fund, investors own a percentage of the ETF, not the stocks within the fund. But buying an ETF is probably not for you if you want to own stocks directly.

Some Advantages and Disadvantages

The structure of dividend growth ETFs has one primary advantage compared to stocks. ETFs provide instant diversification. For instance, an ETF that tracks the S&P 500 Dividend Aristocrats Index would own all or most of the stocks in the index. Currently, 64 stocks are in the index. Hence, investors can easily hold the entire index without having to buy all the stocks on their own. Generally, one needs to own 20 – 30 stocks for an acceptable level of diversification and risk tolerance. All the dividend growth ETFs discussed in this article own at least that many stocks. 

ETFs also have an advantage over mutual funds. Since ETFs are easily traded on exchanges, they are liquid and easily bought and sold by investors. This point also makes ETF pricing more transparent than mutual funds. In addition, the individual equities held by an ETF are disclosed daily, unlike mutual funds, which are reported only quarterly, further increasing the transparency of an ETF.

Dividend growth ETFs also have two disadvantages compared to individual stocks. First, ETFs have a management expense ratio; second, investors do not control which stocks the ETF owns. The expense ratios are often low and typically lower than most regular active and index mutual funds. This concept is critical to understand as expense ratios reduce your returns. Whatever the underlying index’s return, an investor’s total returns will be lower by at least the expense ratios. Other factors, like tracking errors, may further lower returns.

Also, investors do not control buying and selling individual stocks in a dividend growth ETF. Instead, the fund manager makes the decisions. You can buy and sell shares of the ETF. However, the fund manager makes the decisions about the actual stocks held by the ETF. In general, if the ETF tracks an index, it will own the entire index, although that is not always the case. In some cases, the number of holdings or sectors does not match.

There are two other cons about ETFs: small ones tend not to be liquid and are also at risk of closing or merging with another ETF.

Choosing the Best Dividend Growth ETFs

If dividend growth investing is something that you are interested in, then dividend growth ETFs may be a good choice for you. This is especially true for investors lacking time to research and invest directly in stocks. In addition, the number of dividend growth ETFs continues to grow each year, giving investors a reasonably large selection. That said, this presents its own challenge regarding distinguishing and differentiating between dividend growth ETFs. 

Different dividend growth ETFs will have some similarities, but they are not all the same. The main reason for this is that the underlying indices vary. These differences lead to different dividend growth ETFs owning different sectors and stocks. ETFs also weigh the stocks and sectors differently. There may also be other differences, such as in the yield or expense ratio.

Criteria for the Best Dividend Growth ETFs

Many other lists of best dividend growth ETFs catalog almost every single one that is available. However, it is helpful to analyze the different dividend growth ETFs to select between them. But what metrics are important?

One metric that we think is important is the expense ratio, also known as the ER. In general, the ER should be as low as possible. As stated above, expense ratios will subtract from your total returns. Moreover, this effect will increase over time.

The next metric to consider is distribution yield. Most dividend growth ETFs have moderate yields. If you are seeking high income, then a dividend growth ETF is probably not for you. Instead, a high-yield ETF, like SCHD or VYM, may better suit you.

The third metric to analyze is total assets. An ETF with greater assets is more liquid and has a lower chance of closing or merging with another ETF. Additionally, ETFs with more assets tend to be older and have a long-established history, which is a plus.

The last metric to consider is diversification. Investors can examine this from the context of the number of holdings and sectors. There are 11 sectors: Communications, Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Technology, Materials, Real Estate, and Utilities. Not all dividend growth ETFs own stocks in all 11 sectors. Diversification is essential to reduce volatility. Most dividend growth ETFs own dozens to hundreds of stocks across none or more sectors and are adequately diversified.

Comparative Analysis

Comparing and analyzing the dividend growth ETFs in the list by the abovesaid criteria results in the table below. In addition, we have excluded ETFs with less than $500 million in total assets and a history of fewer than five years. Eight remaining ETFs are on the list, including three very popular ones and two with very low expense ratios.

Dividend Growth ETFs

We can also look at the diversification of these eight ETFs based on the percentage of assets in each sector. But, again, it is clear from these percentages that they are not all the same. Indeed, some are very different in their investment focus, which can be attributed to differences in the underlying indices.

Dividend Growth ETFs Sectors

However, all eight dividend growth ETFs in this table deemphasize the Energy and Real Estate sectors. This could be because of the large number of dividend cuts and suspensions during the COVID-19 pandemic. These two sectors suffered a disproportionate number of dividend cuts and suspensions during the pandemic. Hence, equities in these sectors probably do not meet the minimum number of years for dividend growth in most indices. Additionally, some ETFs exclude real estate investment trusts (REITs).

Based on the data and criteria in the above tables, three ETFs stand out as the best dividend growth ETFs. The three ETFs are VIG, DGRO, and SDY. We include VIG and DGRO because of their low expense ratios, the high dollar value of assets, and their long history. We include SDY because of the high dollar value of assets and long history, even though the expense ratio is higher. In addition, all three have an acceptable level of diversification. So now, let’s examine the top 3 dividend growth ETFs.


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VIG – Vanguard Dividend Appreciation ETF

VIG tracks the NASDAQ US Dividend Achievers Index. The fund invests primarily in common stocks of US companies that pay growing dividends. The NASDAQ US Dividend Achievers Index is a modified market-capitalization-weighted index focused on stocks that have increased dividends for at least ten consecutive years. This essentially corresponds to the Dividend Contenders and above.

As seen in the tables above, more than 80% of the holdings are from the Consumer Discretionary, Financials, Healthcare, Industrials, and Information Technology sectors. This is because many stocks in these sectors are Dividend Contenders and therefore meet the 10-year criterion for dividend growth. But the ETF has exposure to five other sectors as well. 

The expense ratio is minimal at 0.06%, and the asset base is a whopping $67.6 billion, making VIG the cheapest and largest dividend growth ETF.

The top 10 holdings as of this writing are UnitedHealth Group (UNH), Johnson & Johnson (JNJ), Microsoft (MSFT), J.P. Morgan Chase (JPM), Procter & Gamble (PG), Home Depot (HD), Visa (V), Mastercard (MA), Pepsi (PEP), and Coca-Cola (KO). The top 10 stocks make up approximately 29.51% of total net assets.

An overview is shown in the chart below from StockRover*.

VIG ETF OVerview
Source: Stock Rover*

Related Article About VYM on Dividend Power

DGRO – iShares Core Dividend Growth ETF

DGRO tracks the Morningstar US Dividend Growth Index. The fund buys stocks with a history of sustained dividend growth and broadly diversified across industries. The Morningstar US Dividend Growth Index consists of stocks that pay qualified dividends, have increased the dividend for at least five uninterrupted years, and have a significant margin to continue growing their dividend. This makes the universe of stocks more extensive and mainly corresponds to the Dividend Challengers and above.

The table above illustrates that the fund has sizeable exposure to the Financials, Information Technology, and Health Care sectors. Combined, these three sectors make up over 57% of total assets. But the ETF has exposure to a total of 10 sectors. In addition, the expense ratio is low at 0.08%, and the asset base is a little over $21 billion making the fund the second cheapest and second largest ETF at the same time.

The top 10 holdings as of this writing are Microsoft (MSFT), Johnson & Johnson (JNJ), J.P. Morgan Chase (JPM), Apple (AAPL), Pfizer (PFE), Procter & Gamble (PG), Merck (MRK), Home Depot (HD), Pepsi (PEP), and United Health Group (UNH). The top 10 stocks make up about 25% of total net assets.

An overview is shown in the chart below from StockRover*.

DGRO ETF Overview
Source: Stock Rover*

SDY – SPDR S&P Dividend ETF

SDY tracks the S&P High Yield Dividend Aristocrats Index. The fund buys stocks that correspond to the index and looks for companies that have consistently increased their dividend for at least 20 years. The S&P High Yield Dividend Aristocrats Index consists of stocks in the S&P Composite 1500 Index that have increased their dividend for at least 20 consecutive years. Additionally, the market cap must be at least $2 billion, with a minimum average daily trading value of at least $5 million.

The table above illustrates that the fund has considerable exposure to the Industrials, Financials, and Consumer Staples sectors. These three sectors make up over 50% of total assets. But the ETF has exposure to all 11 sectors. The expense ratio is reasonably low at 0.35%, but it is high compared to its peers. The asset base is over $20 billion, making it the third-largest dividend growth fund. Notably, this fund has the SEC yield of the eight ETFs examined.

The top 10 holdings are Exxon Mobil (XOM), Cardinal Health (CAH), International Business Machines (IBM), Chevron (CVX), Walgreens Boots Alliance (WBA), Franklin Resources (BEN), National Retail Properties (NNN), Old Republic International (ORI), Leggett & Platt (LEG), and Federal Realty Trust (FRT). The top 10 stocks make up about 16.5% of total net assets.

SDY has the most significant real estate holdings of its peers. Also, the fund invests in REITs. As a result, it has exposure to net lease REITs, like National Retail Properties, that rent commercial real estate on a triple net lease structure.

An overview is shown in the chart below from StockRover*.

SDY ETF Overview
Source: Stock Rover*

Final Thoughts on the Best Dividend Growth ETFs

There are many dividend-growth ETFs, and the numbers continue to grow yearly. As seen from the analysis and discussion above, these ETFs come in different flavors. They vary in the sectors and stocks they invest in and the underlying indices. A  greater number than the eight analyzed here exist, but many are very small ETFs with assets in the tens or a few hundred million dollars, making them riskier. In addition, they often lack sufficient history to judge their performance through different market cycles. 

Three of the ETFs in this list have been through the Great Recession and the COVID-19 pandemic, so they are reasonably well stress tested. The largest and lowest cost dividend growth ETF is VIG, which is not surprising considering it’s from Vanguard.

Disclosure: Long VIG

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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3 thoughts on “Best Dividend Growth ETFs

  1. Love the blog Dividend Power! I really enjoyed the comparative analysis. You can’t really go wrong with any of these stocks, but my favorite is VIG as well. Keep up the great work!

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