Dividend growth investing is often highlighted as a rewarding long-term strategy. With that in mind, equity income investors are right to question the now long-running laggard status of some dividend growth indexes against broader market counterparts.
In a Wednesday report, Morningstar analyst Dan Lefkovitz pointed out that the Morningstar US Dividend Growth Index trailed the firm’s broad gauge of domestic stocks over the past decade. However, it easily topped the equivalent high-dividend index. Among the various dividend growth ETFs on the market today, the WisdomTree US Quality Dividend Growth ETF (DGRW ) stands out as an avenue for potentially avoiding some of the recent disappointment associated with this investing style.
Lefkovitz noted one reason the firm’s dividend growth index has trailed broader equity gauges is that it falls short on various quality metrics such as profitability and returns on capital. DGRW can allay those concerns. That’s because its index emphasizes return on assets and return on equity, among other quality attributes.
DGRW Taps Tech
This fund allocates nearly a third of its roster to technology and communication services stocks. That is above-average relative to many competing ETFs. Those sector exposures are meaningful in terms of accessing newer dividend growers as well as potentially keeping better pace with the broader market.
Morningstar’s “dividend growth index does not include phenomenally profitable, wide-moat stocks Nvidia (NVDA), Amazon.com (AMZN), Alphabet GOOGL), and Meta (META). It contains Microsoft (MSFT) but at less than half the market weight,” noted Lefkovitz.
DGRW allocates nearly more than 18% of its weight to Nvidia, Microsoft, and Apple. That’s not too far off the more than 22% of the S&P 500. DGRW’s roughly 5.10% combined weight to Meta and the two Alphabet share classes is also well above what’s found in nearly all dividend ETFs. That’s a testament to the WisdomTree ETF not relying on payout increase streaks to source components. That methodology precludes competing funds from including Alphabet and Meta. That’s because they’re new dividend payers.
“The biggest factor in the dividend growth index’s lagging returns is its below-market weight to technology stocks. The second-biggest factor is not including Alphabet and Meta among its constituents, both of which were reclassified to the communication services sector in 2018,” added Lefkovitz.
Futuristic Approach Not New
Interestingly, DGRW’s futuristic approach to dividend growth isn’t new for this fund. Rather, it’s been the $16.27 billion ETF’s operating methodology since it debuted more than 12 years ago. That’s something to consider at a time when tech stocks are growing dividends at perhaps the fastest pace in the sector’s history.
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