There are ETFs that cover pretty much any groupings one can think of and that includes issues of interest to long-term investors. I look at four ETFs that are geared toward the prudent dividend growth investor.
To understand exchange traded funds (ETFs) one needs to go back to 31 December 1975. On that date John Bogle opened the First Index Investment Trust, a mutual fund that tracked the S&P 500. Started with just $11 million in assets the fund was called “un-American” and referred to as “Bogle’s folly” by his competitors. Later renamed the Vanguard 500 Index Fund, it crossed the $100 billion milestone by the end of 1999. Today Vanguard is the largest provider of mutual funds with assets over $5 trillion.
With the success of what Fidelity Investments Chairman Edward Johnson once referred to as “just average returns,” companies realized that there was money to be made bypassing mutual funds, which can be complicated for the investor and require minimum amounts to participate. To make things easier for the investor to participate, after some fits and starts, the first ETF to be available in the United States was Standard & Poor’s Depositary Receipts, or SPDR, which tracks the S&P 500.
With about 5,000 ETFs globally (1,750 in the U.S.), these instruments offer convenience and affordable exposure to a wide range of investments. According to etfdb.com there are over 230 dividend ETFs currently being traded in the U.S., so that is a rather large bucket from which to choose. That said, the prudent dividend investor generally looks for companies with strong dividend growth over a long period of time, so that narrows things down a bit.
What I will do is to look at four ETFs that track companies focusing on dividend growth. After all, we have found that Dividend Champions, Aristocrats, and Kings have done quite well when compared to the S&P 500 Index, so if one is seeking to go the ETF route then it might make sense to find one that tracks one of those lists.
Alas, there are no ETFs that track Dividend Champions or Kings. Why this is not the case it a mystery to me. Dividend Champions and Dividend Aristocrats are pretty much the same with the exception that Aristocrats must be listed in the S&P 500 while the Champions do not have that restriction. We will examine an ETF that follows the former.
As Dividend Kings need to have offered at least 50 consecutive years of dividend growth there are only 28 companies in the list. While it seems to me that this could be an extremely low expense ratio ETF, one could make their own ETF by buying all of the companies themselves.
As this blog and website are geared to the small investor one might wonder how I can make such a suggestion. After all, we do not have access to the resources for doing this. One idea might be to copy the companies in the list and paste them into InvestMete (AWR DOV NWN EMR GPC PG PH MMM CINF JNJ KO LANC LOW FMCB CL NDSN HRL TR ABM CWT FRT SCL SJW SWK TGT CBSH MO SYY), enter any number for the Amount, and click the Determine InvestMete button.
It will take a little while to process all of them, but when the numbers are displayed sort by InvestMete and buy what you can of those with the highest InvestMete amounts. My guess is that by purchasing additional shares this way on a regular basis, over the years this dollar cost averaging strategy would eventually include a great many of these companies. But this is an article about 4 ETFs.
There are several best ETF platforms available for dividend growth investors, each with its own unique features and benefits.
ProShares S&P 500 Dividend Aristocrats ETF
NOBL is the best known ETF amongst those who look for dividend growth. It is the only one to track the S&P 500® Dividend Aristocrats® Index, which consists of companies that have increased their dividend every year for the past 25 years, are members of the S&P 500, and meet certain liquidity requirements (actually, all of the S&P 500 meets these liquidity requirements). The stocks within this ETF are equally weighted and are rebalanced four times a year.
| Yield | 5 Year Return | 10 Year Return | Expense Ratio |
|---|---|---|---|
| 1.94% | 10.86% | N/A | 0.35% |
SPDR® S&P® Dividend ETF
SDY tracks the S&P High Yield Dividend Aristocrats (^SPHYDA), which are companies that have increased their dividend for at least 20 consecutive years. Stocks are weighted within the index by indicated yield and adjusted every quarter. The dividend growth streak gives the roughly 60 holdings the characteristic of being some of the safest companies and tend toward stable industries.
| Yield | 5 Year Return | 10 Year Return | Expense Ratio |
|---|---|---|---|
| 2.52% | 10.53% | 13.02% | 0.35% |
Vanguard Dividend Appreciation ETF
VIG tracks the NASDAQ US Dividend Achievers Select Index, which contains companies that have increased their dividend over at least the past ten years. (Disclosure – I recently started a small stake in this ETF.) REITs are not included in this ETF because they do not receive favorable tax rates from qualified dividends. About 180 companies comprise the ETF with exposure primarily in the consumer staples, health care, and industrials sectors.
| Yield | 5 Year Return | 10 Year Return | Expense Ratio |
|---|---|---|---|
| 1.63% | 12.13% | 12.96% | 0.06% |
Schwab U.S. Dividend Equity ETF
SCHD, like VIG, contains companies that have increased their dividend for at least the past ten years. It tracks the Dow Jones U.S. Dividend 100® Index, excluding REITs, master limited partnerships, preferred stocks and convertibles. The index is modified market capitalization weighted. The mix of dividend growth and yield in the roughly 100 companies allow for a greater payout than the above ETFs.
| Yield | 5 Year Return | 10 Year Return | Expense Ratio |
|---|---|---|---|
| 3.03% | 11.32% | N/A | 0.06% |
Of Note
SDY and VIG have been around since 2006, so they have 10 years of history to report. Since these ETFs have fairly strict consecutive streak requirements and are passively managed this is really of no advantage over others with less history.
Of definite advantage, however, is the fact that both VIG and SCHD have very low expense ratios. Expenses can savagely cut into one’s holdings, so having a low expense ratio is an important part of maintaining one’s portfolio. If a higher expense ratio is to be paid then there should be a strong reason for seeing more money taken out of one’s pocket.
Other Growth Dividend ETFs
Indeed there are other ETFs that base their selection on dividend growth and this was certainly not intended to be a complete list. However, they do start to become redundant. For instance, Invesco Dividend Achievers ETF (PFM), which was mentioned in Dividend Champions, Achievers, Kings and Aristocrats – A Comparison against the Indexes, is nearly the same as the Vanguard Dividend Appreciation ETF (VIG) with the exception that the former allows REITs and the latter does not. However, with an expense ratio of 0.54% it does not compare well against VIG.
There are others, like iShares Core Dividend Growth ETF (DGRO), that are based on dividend growth but only require a consecutive string of five years, similar to Dividend Challengers. It does offer an attractive expense ratio of 0.08%, but in my mind such a short streak, while certainly better over the long haul than companies not offering a dividend, is less of a growth streak we would normally seek.
Finishing Up
With research one should be able to find other ETFs that better fit their specific requirements. If one is looking for ETFs that concentrate on dividend growth over a long period of time, any of the above can work well as the cornerstone in one’s portfolio.
