Not every stock has to be a slam dunk, and the same goes for ETFs, too. That’s because by swinging for the fences every time, you may strike out when you could have gotten singles and doubles that add up over time.
This brings me to the iShares Core Dividend Growth ETF (NYSEARCA:DGRO), which is a well-balanced ETF that’s suitable for a total return portfolio.
While DGRO isn’t the highest yielding ETF, it does carry durable attributes that can give an investor peace of mind. Let’s explore what makes DGRO a good ETF to own for those seeking income and growth.
Why DGRO?
DGRO is an ETF that's designed to track the investment results of the Morningstar US Dividend Growth Index. Given its dividend-focused nature, DGRO differs from the S&P 500 (SPY) in its higher exposure to income oriented sectors such as Financials, Health Care, and Industrials.
Nonetheless, DGRO also has something for tech investors, as it has Apple (AAPL), Microsoft (MSFT) and Broadcom (AVGO) among its top 10 holdings, as shown below.
Admittedly, DGRO is not as high yielding as some other dividend ETFs, notably the Schwab U.S. Dividend Equity ETF (SCHD). However, it does hold its own, with a 2.3% dividend yield and a respectable 10.6% 5-year CAGR.
One reason for why DGRO’s yield isn’t particularly high is because it doesn’t hold high yields like Verizon (VZ) as its top holdings, which is the case for SCHD. As shown above Exxon Mobil (XOM), JPMorgan Chase (JPM), and Apple comprise DGRO’s top 3 stocks.
As many are aware, XOM has seen its cash balance swell over the past 12+ months, as oil prices came roaring back. However, it and its fellow DGRO holding Chevron (CVX) do not appear to be overvalued, as they carry PE ratios in the 10 to 11x range. This is similar to that of Occidental Petroleum (OXY), a stock with a junk BB+ credit rating and one in which Warren Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) has been buying aggressively, even now.
While it remains to be seen what XOM and CVX does with their large cash balances, it could be a combination of dividend increases, share buybacks, and growth investments.
With the Biden administration aiming to raise the tax on share buybacks, companies like XOM could opt to returning more cash to shareholders instead, and that holds true for the other two holdings in DGRO’s portfolio as well.
Moreover, AAPL is generally not considered to be an income stock, but rather a total return stock as the company has prioritized share buybacks as a tax efficient form of capital return. However, that could also change with additional taxes being levied to corporations on share buybacks.
Importantly, DGRO has held its own against the S&P 500 over the past 5 tumultuous years. As shown below, it produced a 56.6% total return during this timeframe, slightly edging out the market average.
Plus, thanks to the conservative nature of DGRO’s dividend paying companies, the ETF has given investors more downside protection. As shown below, DGRO has largely outperformed the S&P 500 from a total return standpoint for much of the past 12 months, and particularly in the October to present timeframe, when the market was the most volatile due to inflation and interest rate hikes.
All the while, DGRO scores an A+ expense grade due to its very low 0.08% expense ratio, sitting well under the 0.47% median across the ETF universe.
Considering all the above, I believe DGRO is worth a look for total return investors and above market average yield. As shown below, DGRO scores a 3.8 Buy rating on Seeking Alpha’s Quant, with A scores for expenses, dividends, risk and liquidity, and a B+ for momentum.
Investor Takeaway
DGRO provides investors with a total return-oriented dividend ETF that is backed by many well managed fortune 500 companies. These companies could choose to materially shift capital towards dividends should taxes on share buybacks be raised.
With its low expense ratio and above market average yield, DGRO can provide investors with more downside protection and long-term growth. As such, it could be an ideal choice for those seeking an ETF that provides a combination of value and income.
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