Some investors might overlook dividend stocks in favor of more exciting themes like artificial intelligence, genomic medicine, or self-driving cars. However, dividend stocks have been a key driver of the S&P 500's total returns since 1930, accounting for about 40% of its gains over this period. Dividend-growth stocks, or companies that regularly raise their dividends, are especially powerful in this regard. The main reason is that reinvested dividends take advantage of the concept of compounding to amplify capital gains.
Finding the best dividend-growth stocks can be challenging. Fortunately, the dividend-growth strategy works well with the exchange-traded fund (ETF) approach to investing. ETFs are cost- and tax-efficient vehicles that often outperform individual stocks because of their diversification factor (less risky than single stocks).
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In line with this idea, several ETFs have been designed to capture the dividend-growth strategy. Among them, the iShares Core Dividend Growth ETF (DGRO -0.14%), the WisdomTree U.S. Quality Dividend Growth Fund (DGRW 0.38%), and the Vanguard Dividend Appreciation Index Fund (VIG 0.10%) have been among the best performers over the past five years. Let's compare and contrast these three dividend-growth funds to find out which one is most deserving of our hard-earned capital.
Fund traits
The iShares Core Dividend Growth ETF is a fund that tracks the Morningstar US Dividend Growth Index, which consists of large-cap U.S. companies with a history of increasing their dividends. The DGRO, launched in 2014, has 434 holdings, a yield of 2.47%, and a fairly low expense ratio of 0.08%. In the past five years, the fund returned 80.7% in total (assuming reinvested dividends and before taxes), but it badly lagged behind the S&P 500 by 21.6% over this same period.
Founded in 2013, the WisdomTree U.S. Quality Dividend Growth Fund tracks the WisdomTree U.S. Quality Dividend Growth Index, which consists of a basket of large-cap U.S. stocks with strong growth characteristics and a history of dividend increases. The DGRW has 297 holdings, a yield of 1.84%, and an expense ratio of 0.28%. Over the prior five years, it produced total returns of 100.2%, barely underperforming the S&P 500 by 1.7%.
Established in 2006, the Vanguard Dividend Appreciation Index Fund aims to replicate the performance of the S&P US Dividend Growers Index. The S&P US Dividend Growers Index is comprised of companies with a track record of increasing their dividends. The VIG holds 314 positions, it has a yield of 1.87%, and an expense ratio of 0.06%. It produced total returns of 87.8% over the prior five years, falling short of the S&P 500's total return by 14.6%.
Comparison
The DGRO, the DGRW, and the VIG are three funds that focus on dividend-growth stocks in the U.S. market. They differ in their number of holdings, yield, expense ratio, and performance relative to each other and the S&P 500. Turning to the specifics, the DGRO has the most holdings and the highest yield but also the lowest return and the largest underperformance of the S&P 500 among the trio over the past five years.
The DGRW has the fewest holdings and the lowest yield but also the highest five-year return. It is the only fund that essentially matched the performance of the benchmark S&P 500 in the last five years. The VIG has a comparable yield and expense ratio to the DGRW but a considerably lower five-year total return on capital.
All things considered, the DGRW offers the most attractive mix of yield, fees, and long-term performance. Although this fund charges the highest fees, its superior performance is arguably worth the price of admission.
