Vanguard Dividend Appreciation (VIG), WisdomTree US quality Dividend Growth Fund (DGRW) and iShares core Dividend Growth are among the most popular ETFs on Wall Street. They have assets of $102 billion each, while the iShares Core Dividend Growth fund (DGRO), with its $30.7 billion asset, is the third-most-popular.
Solid performance from ETFs
These funds, as their name suggests, are intended to offer their owners a steady stream of dividends.
The VIG ETF follows the S&P US dividend growers index. This is designed to give investors an opportunity to invest in companies with a history of growing their dividends.
The fund’s constituent companies include a majority of tech-related firms, followed by healthcare, financial services, consumer staples and industrials. Apple, Broadcom JPMorgan UnitedHealth Exxon Visa are some of the most prominent names within the fund.
WisdomTree US Quality Dividend Growth Fund, however, is a fund that invests in dividend-paying companies who have consistently increased their payments for many years. The majority of the constituents are also in tech, health care, industrials and financials. Microsoft, Apple Broadcom AbbVie and NVIDIA are the largest firms within this fund.
The DGRO ETF, a popular ETF that focuses on growth in dividends is also gaining popularity. The Morningstar US Dividend Growth Index invests in 413 different companies. The fund’s biggest investors are in financials, technology and healthcare. ExxonMobil is the largest company.
The track record for these funds is excellent. The DGRW ETF, as shown in the chart below, has enjoyed a return total of 107% over the last five years. DGRO, VIG and other funds also returned 83% to 85% over the same time period. This performance can be replicated over other timeframes.
The funds are composed of companies with a long history of success. Top constituents of the funds, such as Broadcom, Microsoft and AbbVie, have an impressive track record.
Dividend ETFs: Are They Really a Thing?
It is unclear whether or not these ETFs qualify as dividend funds. Should one buy them in order to get their dividends on a regular basis?
VIG ETF’s dividend yield is 1.7%, with a 4-year average of 1.78%. The DGRW Fund has a similar yield, 1.47%. It also boasts a 4-year average yield of 1.88 percent. DGRW pays out 2.16%, and the average over four years is 2.25%.
In this example, VIG ETF pays about $170 for $10,000 invested, while $148, $225 and $148, respectively, would be paid by the two other ETFs.
The expense ratio as well as taxes must be included in the calculation of the dividend. VIG, DGRO and DGRW have expense ratios of 0.08% while DGRW has a 0.28%. We can see from this that these funds offer a very low total return on investment.
When deciding whether a dividend fund is a good one, there are two factors to take into consideration. The first is a risk-free rate of return. In most cases this is achieved by investing in US Government Bonds. The ten-year investment yields 4.2%. This means that $10,000 will earn $420 or double the return of the other three funds.
These bonds are not growing, but there’s a chance that their yield will drop as the Fed lowers rates.
The second thing you should do is invest in an index tracker fund with low costs, such as the Vanguard S&P 500 (VOO). VOO’s expense ratio is 0.03%, and it yields a dividend of 1.26%. The average for the last four years is 1.46%.
ETFs have never been marketed as dividend funds, and the majority of investors do not invest in ETFs for their dividends. The fund tracks only the top five hundred companies.
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Concentrating on total returns
We have therefore concluded that VIG, DGRO and DGRW aren’t good dividend ETFs due to their low yields.
Data shows, however, that ETFs that track the S&P 500 Index generate better returns in the long run. As shown in the chart above, VOO ETF had an overall return of 112% over the past five years.
DGRW has generated 107% while DGRO, VIG and 85% have been returned. The VOO ETF has generated higher returns for investors than the funds of the other funds.
This year, the VOO ETF returned 24.24 % while the others returned under 21 %.
If you’re looking to invest for the long-term, you may do well by sticking with the S&P 500. If you’re looking for dividends instead, consider the BNY Mellon High Yield Strategies Fund or Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust which both pay more than 8%.
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