Top 4 Dividend Growth ETFs

Dividend growth ETFs provide instant diversification.Although I have a strong preference for a particular ETF, I contend that it is reasonable to also diversify one’s ETF investments.The average yield for the highlighted ETFs is 2.41%, and the average annual dividend growth rate is nearly 11%.

Top 4 Dividend Growth ETFs

I am a proponent of stock-picking. Investing in individual stocks provides me with an edge over the market, and my portfolio consistently outperforms the S&P 500.

However, I understand why some investors prefer ETFs. Exchange-traded funds provide instant diversification, and investing in ETFs does not require one to be melded to the market, as I am.

ETFs also provide a wide range of investment options, but at the same time, they eliminate a bit of the labor involved in investing in individual tickers. In a sense, it is as if you have a group of investment advisors working for a greatly reduced cost.

So, while the bulk of my portfolio is in individual stocks, my largest position is in a dividend ETF.

My Evaluation Criteria

While conducting my research for this article, I whittled through a large number of dividend-oriented ETFs. A truncated list of the tickers I perused includes SCHD, VYM, DGRO, VIG, NOBL, SDY, IDV, VYMI, QDIV, QUAL, IDV, HDV, LVHD, SPHD, SPYD, REGL, and FDV.

I reviewed the 3-year, 5-year, and 10-year ratings provided by Schwab as well as the 5 and 10-year (when available) returns for each ETF. I also considered the current yield and the 5-year dividend growth rates. Additionally, I weighed the expense ratios of each fund.

Note that Schwab's rating system is on a scale of one to five, with five being the better end of the ratings. The sole exception is when using the historic risk rating. In that case, the lower number is the better.

After considering each of these factors, I was left with four ETFs that I consider the best of the bunch. I provide an overview of each with my number one holding being reserved for last.

ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL)

NOBL tracks the performance of the S&P 500 Dividend Aristocrats Index. The fund holds a minimum of 40 stocks with the positions being equally weighted. No sector can comprise over 30% of the fund, and a minimum of 80% of assets are invested in component securities of the index. The fund's goal is to remain fully invested in securities and/or financial instruments that, in combination, provide exposure to the returns of the index without regard to market conditions, trends or direction.

To qualify as a Dividend Aristocrat, a stock must be a member of the S&P 500 and have a history of increased dividend payments for a minimum of 25 consecutive years. A minimum $3 billion market cap and at least $5 million dollars in trading volume per day averaged over the trailing three-month period are additional requirements for inclusion in NOBL.

The Index is reweighted on a quarterly basis beginning each January. The consumer staples and industrial sectors are currently the most heavily weighted in the ETF, with each comprising about 23% of the portfolio.

NOBL yields 1.90% and has a 5-year dividend growth rate of 8.47%. Schwab gives the ETF a 3-year rating of three and a 5-year rating of five. For historic returns, NOBL is rated as a four, and for risk, the ETF receives a two.

NOBL has a net expense ratio of 0.35%. Excluding dividends, the 5-year return is just below 50%.

iShares Core Dividend Growth ETF (NYSEARCA:DGRO)

Managed by BlackRock Fund Advisors, DGRO seeks to mirror the return of the Morningstar US Market IndexSM, a broad market index that represents approximately 97% of the market capitalization of publicly-traded U.S. stocks.

In a sense, the ETF is highly diversified, with over 440 stocks in the portfolio. However, the top ten investments comprise over a quarter of the ETF's positions.

The Information technology, healthcare, and financial sectors each comprise a high-teens percentage of DGRO and collectively account for about 54% of all holdings.

The criteria for inclusion in the index is that a stock must generate five consecutive years of dividend growth, have a dividend payout ratio below 75%, must have a positive consensus earnings forecast, and cannot have a dividend yield in the top ten percent of peers.

REITs are excluded, and to insure a proper level of diversification, all individual positions are capped at 3% of total holdings when the fund rebalances.

Unlike some rivals, DGRO has a fairly heavy weighting in tech stocks. For example, Microsoft (MSFT) and Apple (AAPL) constitute nearly 7% of the ETF's current holdings.

Schwab gives the ETF a 3-year rating of three and a 5-year rating of five. For historic returns, DGRO is rated as a four, and for risk, the ETF receives a two.

The current yield is 2.37% and the 5-year dividend growth rate is 10.32%.

DGRO has a net expense ratio of 0.08%. Excluding dividends, the 5-year return is just over 50%.

Invesco S&P 500 Quality ETF (NYSEARCA:SPHQ)

Before I began my research for this article, I was utterly unaware of SPHQ.

SPHQ seeks to track the investment results of the S&P 500® Quality Index. The fund invests at least 90% in the securities that comprise the underlying index. The ETF calculates a quality score for each of the members of the S&P 500® Index.

The quality score is calculated using three fundamental measures: return on equity, accruals ratio, and financial leverage ratio.

Return on equity is based on the trailing 12-month earnings divided by book value per share. The accruals ratio is the TTM net operating assets divided by total assets over the last two years, and the financial leverage is the latest debt ratio divided by book value.

The ETF consists of 100 stocks with the highest quality score. Passively managed, the stocks are rescored and the ETF is rebalanced and reconstituted semiannually. When rebalanced, each sector must be represented in the portfolio, and no sector can constitute more than 40% of the ETF's holdings.

Schwab gives the ETF a 3-year rating of four and 5-year and 10-year ratings of five. For historic returns, SPHQ is rated as a four, and for risk, the ETF receives a two.

The current yield is 1.77% and the 5-year dividend growth rate is 8.74%.

SPHQ has a net expense ratio of 0.15%. Excluding dividends, the 5-year return is just over 62%, and the 10-year return is nearly 169%.

Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD)

I consider SCHD to be the crème de la crème of all ETFs, and it is the largest single investment in my portfolio.

This fund fully replicates the Dow Jones U.S. Dividend 100 Index, which features 100 stocks that have paid dividends for at least ten consecutive years and boast the financial health to continue their streak.” – Morningstar

SCHD incorporates an additional seven quality measures to screen the stocks that will comprise its portfolio. SCHD does not invest in REITs.

This fund's ability to provide strong returns over a long time span is a primary reason it gains my favor. From 2012 through 2022, the total annual return for SCHD has only been in the negative during three years. The worst of those was in 2018 when the total annual return was -5.56%. In eight of those eleven years, SCHD notched double-digit total annual returns.

The average annual total return in that time span was 14.21%.

Schwab gives the ETF a 3-year rating of four and a 5-year and 10-year rating of five. For historic returns, SCHD is rated as a five, and for risk, the ETF receives a two.

The current yield is 3.60% and the 5-year dividend growth rate is 15.56%. SCHD has grown the dividend every year since its inception.

SCHD has a net expense ratio of 0.06%. Excluding dividends, the 5-year return is just over 51%, and the 10-year return is nearly 125%.

Summation

While there are ETFs that generated marginally higher returns, I also considered the safety that is represented in these funds. The four highlighted ETFs tend to outperform the S&P 500 by wide margins during bear markets.

My rule of thumb (with rare exceptions) for investing in ETFs is when the current yield exceeds the average yield over each of the last three years, I will consider adding to my position.

For example, the yield for SCHD now stands at 3.60% while the average yield in 2020, 2021, and 2022 was 3.34%, 2.87%, and 3.15%, respectively.

Dividend ETFs are a means to grow passive income while also gaining instant portfolio diversification. I hold a position in each of these funds, although my investment in SPHQ was initiated following research for this article.

SCHD: Why I Doubled My Investment In This 3.6% Yielding Dividend ETF