The iShares Core Dividend Growth ETF (DGRO) has done well since its inception in 2014. It has risen from its initial price of $19.45 to the current $62.50, or a 233% return.
While this is a good return, it has underperformed other popular passive funds like the Vanguard S&P 500 ETF (VOO), which has risen by over 250% in this period.
On the positive side, it has done better than the highly popular Schwab US Dividend Equity ETF (SCHD) fund, which has soared by 211% in the same period.
What is the DGRO ETF?
The iShares Core Dividend Growth ETF is a fund that aims to provide investors with regular dividends.
It is a five-star rated fund that tracks the Morningstar US Dividend Growth Index, which comprises over 400 companies with a record of growing their dividends.
Most companies in the fund are in the financial services industry followed by technology, healthcare, industrials, and consumer staples.
The biggest company in DGRO is ExxonMobil, the biggest energy company in the United States. Exxon has done well in the past few years, helped by its growing market share and higher oil prices.
It is a dividend aristocrat that has grown its dividends in the last 25 years. Estimates are that it has spent over $120 billion in dividends in the last ten years. It has also spent billions of dollars repurchasing its stock.
Microsoft is the second-biggest company in the DGRO ETF. It has become the second-biggest company globally with a market cap of over $3.2 trillion. Like Exxon, Microsoft has a good recore of paying dividends, which it has raised in the last 19 years. Its five-year dividend growth rate was 10.27%.
Apple is another big name in the DGRO ETF. It has raised dividends in the last decade, with a five-year growth rate of 5.50% and a payout ratio of just 14%.
The other top DGRO ETF companies are JPMorgan, Chevron, Johnson & Johnson, AbbVie, Home Depot, and Broadcom. The top ten companies represent about 26% of all the 417 companies in the fund.
Reasons to avoid the DGRO ETF
DGRO is a good fund that has demonstrated that it can do well in the past decade. However, there are a few reasons why it is not a good dividend growth ETF.
First, it has a tiny dividend yield of 2.20%, which is lower than what government bonds pay. For example, the 10-year Treasury yield stands at 4%, while the 2-year yield is 3.95%. This means that investing in shorter-term government yields is more attractive.
When calculating a fund’s yield, it is always important to include capital gains taxes, which you will need to pay when you exit the investment. As such, one of the best alternatives to DGRO for dividend investors is the iShares National Muni Bond ETF (MUN), which offers a 2.92% yield and no taxes.
Second, for dividend-focused investors, there are better funds to invest in. A good example of this is the JPMorgan Equity Premium Fund (JEPI), which employs a covered call strategy. In it, the fund invests in some companies in the S&P 500 and then sells call options to take a premium.
The JEPI ETF has a 7.7% yield and an exposure to the S&P 500 index. Other popular alternatives are funds like the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and the Cboe Vest S&P 500 Dividend Aristocrats Target Income ETF, which yield over 4%.
VOO ETF is a better alternative
Additionally, the Vanguard S&P 500 ETF is a better ETF than the DGRO fund. For one, it has a smaller expense ratio of 0.03% compared to DGRO’s 0.08%. While this is a small difference, it can add up over time, especially when you are holding it for the long term.
VOO is a straightforward ETF that tracks the S&P 500 index, which was started in 1957. Since then, the fund has jumped from $44 to almost $6,000 today. This means that, excluding inflation, a $100 invested in it on its first day would now be worth $13,600.
The S&P 500 index has gone through the biggest risks in the past decades. It survived the 1987 crash, the dot com bubble, the Global Financial Crisis, and the Covid-19 pandemic.
As shown above, the VOO ETF has a long track record of beating the DGRO fund. For example, VOO’s total return this year is 20.67% compared to DGRO’s 17.5%.
Similarly, the five-year total return was 109.8% compared to VOO’s 82.2%. This means that investing in VOO has brought in better returns over time.
Most importantly, the two funds track almost the same companies. DGRO has most companies in the S&P 500 index.
Read more: 4 key catalysts for the Vanguard S&P 500 ETF (VOO)
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