I wanted to take a few minutes tonight to compare two ETF’s that find their way on to every dividend growth investor’s radar, at some point. At first glance, the two ETF’s seem very similar but are they different? Is DGRO or DGRW the better ETF?

In today’s post we’re going to compare DGRO v DGRW in a heads up battle for the true D-Grow ETF. Let’s get into it.

But first, I hold one of these ETF’s myself. Which one did I think was the best? Check out my Unqualified Investors Portfolio.

Post Agenda

• DGRW Investment Strategy
• DGRO Investment Strategy
• DGRO v DGRW Returns Compared to the S&P 500
• Pros & Cons to DGRW
• Pros & Cons to DGRO
• DGRO v DGRW Key Considerations

DGRW Investment Strategy

DGRW – WisdomTree U.S. Quality Dividend Growth Fund

WisdomTree employs a unique investment philosophy with regard to dividend or dividend growth investing. Rather than focusing, as others do, on just the dividend history, they emphasize a return on equity(ROE) and a return on assets(ROA). Their aim is to find stocks with the potential for future dividend growth. The primary thought is that by focusing on these reliable criteria they may be able to avoid assets simply growing the dividends alone. Thus eliminating assets that may face potential dividend cuts or suspensions.

Additionally, DGRW maintains an above average technology sector allocation. A trait not inherent to other dividend growth ETF’s. With over 30% allocated to technology stocks DGRW hopes to take part in substantial gains within that sector of the market.

DGRO Investment Strategy

DGRO – iShares Core Dividend Growth ETF

IShares follows a more traditional approach to dividend growth investing. They target companies with at least a 5 year dividend growth track record and below 75% of earnings being paid in dividends. This approach to dividend growth investing seeks to find assets offering steadily increasing dividends at a sustainable level.

However, unlike DGRW, DGRO does little to favor one sector over another. Largely the ETF maintains an S&P 500-like profile, allocating capital across a range of sectors equitably.

DGRO v DGRW Returns Compared to the S&P 500

When comparing DGRO v DGRW to the overall market over the previous 10 year period, both DGRW and DGRO have shown competitive performance.

• DGRW: 12.79% annualized returns
• DGRO: 11.49% annualized returns
• S&P 500: 13.46% annualized returns

From a longer term results perspective, investors would have still achieved a higher return investing into the S&P. However, for those needing the higher dividend yield or better yet, a growing dividend yield then both DGRW and DGRO offer a compelling argument. Still, in this instance, DGRW edged out DGRO in annualized returns over the previous 10 years.

DGRW – Pros & Cons

DGRW Pros:

• Focus on quality metrics such as ROE and ROA rather than just dividend increases.
• Higher allocation to technology sector.
• Lower maximum drawdown compared to the S&P 500.

DGRW Cons:

• Slightly higher expense ratio compared to DGRO
• May underperform during strong growth periods.

DGRO – Pros & Cons

DGRO Pros:

• Lower expense ratio compared to DGRW.
• Simpler dividend growth strategy with edge toward dividend sustainability.
• Broader, market-like exposure profile.

DGRO Cons:

• Marginally lower annualized returns compared to DGRW.
• Lower allocation to any specific market sector.
• Higher maximum drawdown compared to DGRW.

DGRO v DGRW Key Considerations

When considering either ETF investment it would be important to think about which strategy better suits you as an investor. Do you like the idea of investing into dividend growth companies based on their returns or through a more straightforward methodology? Both DGRO or DGRW offer investors exposure to dividend growth companies but how they reach that goal is substantially different. Historically, the edge in that department remains with DGRW.

Moreover, investors seeking a focus on quality growth metrics with higher allocation to tech stocks would probably favor the DGRW ETF. However, DGRO’s more traditional approach shouldn’t be discounted to heavily. It’s often said that if it isn’t simple enough to explain to a kid it’s probably too complicated. With DGRO an investor would have a lower expense ratio and an easy to understand investment philosophy.

In all, both ETF’s have a unique offering for investors to consider. Neither ETF has an expense ratio that should send us running for the hills so it really just comes down to which strategy is preferred. Personally, I prefer the higher starting yield with DGRO v DGRW’s lower initial yield. DGRW may ultimately provide more in terms of quote, unquote, dividend growth, but they lag DGRO’s current yield significantly.

In that light, DGRO is my preferred ETF in the DGRO v DGRW debate. Which is highlighted by the significant investment you can see in my Unqualified Investors portfolio.

Until the next post.

God bless,

Jeff

<p>The post DGRO v DGRW: Which Is the Best Dividend Growth ETF? first appeared on UQinvest.com.</p>

Now, on to the fourth of five foundational investment styles, dividend growth investing. Of the many popular investment styles, dividend growth investing may just be a little of every style rolled into one. I suppose ultimately that will be for you to decide but it’s an investing method that fits me very well and one that I’m currently implementing in my own portfolio.

Let’s get into the details and when we’re done you’ll have a fantastic understanding of the dividend growth technique and it’s many benefits.

As always, I’m not a financial advisor and this isn’t a recommendation. Just my attempt at highlighting some of the critical elements to an often misunderstood investment style.

Post Contents

• Growth or Dividend Growth?
• Compounded Returns
• Staples and Income
• Performance Qualities
• Risk Management
• Passive Income
• Yield & Payout
• Growth Prospects
• Diversification: Do I need it?
• Dividend Kings, Champions, Aristocrats, Contenders, & Achievers
• Uncle Sam & the Tax Bill
• Downsides to Dividend Growth Investing
• Dividend Cut, oh my!

Growth or Dividend Growth

Not to be confused, growth and dividend growth are indeed two separate concepts. I discussed growth investing in detail here, growth investing 101. Dividend growth investing however is in regards to a dividend paying company consistently raising their dividend payment. Not necessarily a growing share price or revenue growth. A key difference that shouldn’t be misinterpreted.

While both styles of investing can experience share price appreciation, dividend growth investors generally prioritize those companies keen to increase their dividend payment at regular intervals. The allure, is the ever growing passive income stream. Possibly one of the easiest avenues to earning an income. Many investors seeking this style of investment have big dreams of one day living comfortably from the dividends alone and with many years of dividend growth they may just be on too something.

This style of investing isn’t new and it’s an approach that has stood the test of time. Many are the investors before us that have used this method to weather difficult economic periods. The advantages to dividend growth investing are mostly clear to see as passive income abounds. Although, with every investment there are downsides and we’ll discuss several ahead.

Compounded Returns

As is the case with dividend investing or income investing, dividend growth investing at it’s core aims to parlay this growing cash dividend into a veritable cash printing press. The ability to re-invest this additional capital is, in my mind, similar to a company retirement match program. Only here, the employer, or the business as it were, is matching at an increasing rate. Not generally something you’ll see from an actual employer match program.

Still, the power of re-investing these seemingly modest raises can have an outsized impact over an investment lifetime. Feel free to play around with this dividend growth calculator to get an idea what may be possible.

For example, a $10,000 dollar investment with $500 contributed each month would grow to nearly $1.3 million if the return average was 7%. Additionally, the income each year would total more than $150,000. Shocking to see but the math is there. The real question is whether our investments can earn that 7% year over year return and whether we’re able to stay the course through good times or bad.

That said, historically the S&P 500 returns approximately 10% each year so I do find some comfort in that. For fun, averaging 10% YOY would result in a portfolio value of $1.9 million and an annual income of $235k. These calculators are always fun but only time will confirm their worth. In my experience, real world math can be dramatically different than spreadsheet math.

Staples and Income

Generally speaking, dividend growers are already established firms dominating a particular market segment. Think Coca-Cola or Walmart. While much of their growth has already been experienced these companies agree to return an increasingly larger dividend to shareholders as an incentive. When inflation or prices increase so too does revenue generated from these firms. Often, these companies have become so dominate in their respective spaces it would be virtually impossible for another to supplant them.

By investing into a dividend growing asset, investors may take refuge knowing their vehicle of choice isn’t easily eliminated. And in a market rife with uncertainty, that can be a deciding factor.

Companies able to consistently grow their dividend mean shareholders income increases on auto-pilot. Making dividend growth investing, frankly, unmatched in that regard by other investment philosophies. This additional income could be used even during prime earning years to pay bills, take vacations, or simply be re-invested. The possibilities for what to do with the additional capital remain yours but if history or those dividend calculators are to be trusted, re-investment is probably best.

Before I move on, it isn’t necessarily common for a company to have experienced this level of growth or success and there is no guarantee they’ll continue to in the future. As such, companies paying an ever increasing dividend are usually those providing products or services to our every day lives. Similar to the above mentioned Walmart or our electricity company. Meaning, careful thought should occur before becoming too heavily invested into a relatively small subsection of a much larger market.

Performance Qualities

Considering what we already know with regard to dividend growth investing much of their future performance may well be tied to their dividend increases. As discussed, companies having grown their dividend for 10, 20, 30, or even more years aren’t the status quo. There simply isn’t enough market for every company to achieve this status. With that, it remains imperative that a potential investor consider fully the performance characteristics of an asset. Or said another way, potential for underperformance in comparison to another asset or investment technique.

History is on our side however with stories as outlandish as uncle Ned’s record breaking bass catch that somehow magically, “got away”. The difference though, many of these stories are true and we all know Ned didn’t catch more than a buzz!

There are indeed many truthful studies having shown dividend growth stocks outperforming their non-dividend counterparts. For example, here is an article from Hartfordfunds.com with several references about the power of dividend growth over time. The key takeaway is that much like the entire stock market, dividend growth stocks ebb and flow in and out of favor among investors. Still, the performance is plain to see and over time a growing dividend re-invested can perform admirably.

Risk Management

No matter the investment style we adopt risk mitigation should remain at the forefront of our decision-making process. Having learned from experience that neglecting risk is a costly mistake. Established dividend growers are inherently risk averse since most operate, as mentioned, in markets we need in good times or bad. I honestly doubt people are going to stop needing Johnson & Johnson’s motrin during a time of recession. If anything, those sales should improve.

Dividend growth investing, in a way, knocks down several birds with one stone. It allows an investor the opportunity for growth, dividend growth, and to some extent an internal risk control mechanism. By investing into dividend growth assets an investor may find additional comfort knowing two simple truths. One, these companies can still thrive during a contractionary economic period. Two, dividend growth stocks often find favor among other investors during heightened periods of uncertainty. Characteristics hard to find elsewhere except maybe bonds, treasuries, or other fixed income investments. Which, by the way, don’t offer even a hint of growth above their current rate.

Lastly, and the very reason to consider dividend growth investing, is the dividend. During uncertain periods, true dividend growers maintain and even increase their dividends like clockwork. With a steady income stream, favor during economic turmoil, and a non-stop revenue stream, dividend growth investors may prove to be the most prepared investing class of them all.

Passive Income

Simply stated, passive income is money earned that we haven’t lifted a finger to receive. Possibly the greatest form of income, passively earning is what millionaires, billionaires, and even trillionaires are made of. Those claiming this title have done the work and now receive their “mail box money” as I’ve heard it called.

Dividend growth investing fits comfortably here in that as an investor the only work we’re required to do is invest in a similar asset. After that, the investment will spin off income at regular intervals and no additional input would ever be required. However, most choose to re-invest their passive income back into the holding or into a similar broad index with the intention of compounding the investment.

No matter the desired use for this stream of income those choosing to invest into dividend growers are increasingly rewarded for having done so. A facet no other investment class could claim.

Yield & Payout

Yield as it’s commonly referred, is a measure of the dividend amount compared to the current share price. For example, a company with a $100 share price and a $2 annual dividend would have a dividend yield of 2%. $2/$100 = .02 or 2%.

Payout or payout ratio is a measure of a companies earnings paid out as dividends, expressed as a percentage. For example, suppose a company’s net income was $1 million and it pays out $100k in dividends the payout ratio would be 10%. $100k/$1 million = .1 or 10%.

Either metric is well regarded among dividend growth investors. The yield indicating what amount they’ll receive as a dividend and the payout reflecting the sustainability of that dividend. Specifically, investors may pay close attention to the payout ratio for signs of trouble to a payment or for confirmation future dividend hikes are warranted.

Both metrics offer investors insight but yield is probably the most touted metric across the investment landscape. From Youtube to the bus stop you won’t find anyone unwilling to boast of their investment yield. Similar, I think to uncle Ned’s fishing stories!

Growth Prospects

If there were a lacking quality to dividend growth investing this is it. A quick search across the web will showcase what I mean. Differing investment camps have verbal death matches surrounding this topic.

On one side, dividend growth investors are quick to claim that what they lack in share price appreciation is accually returned in the form of dividends. And by re-investing those dividends the investment decision is sound. On the other, growth focused investors are equally as quick to showcase their Nvdia investment compared to the likes of Coca-Cola or similar.

Akin I believe, to the speed vs comfort argument. In my 20’s give me a corvette, no question. In my 40’s, no thanks, I’ll take the pickup truck every day of the week.

While that battle may rage on for a millennia, it isn’t uncommon for dividend growers to experience a sub-optimal share price return. Making it a key consideration for possible dividend growth investors. No and any decision but a necessary one.

I suppose there are more than a few success stories of investors having successfully navigated differing investment styles but that isn’t necessarily the norm. Should a mixed approach be preferred the benefits to dividend growth investing may ultimately be negated. However, any philosophy is more than fine, so long as it fits your personality and risk tolerance.

Diversification: Do I need it?

Well, yes and no is probably true. Dividend growth investors may find themselves under diversified at times as dividend growth investments occupy a relatively modest corner of the total market. With attention however this shouldn’t be a meaningful detraction. Any investor can surely build a portfolio that spans various segments or sectors.

That said, those with experience may find diversification to be a rather limiting factor. As one asset soars another sours, effectively neutralizing a portfolio. Those with the fortitude and foresight to avoid mistakes may find that under diversification could just be a catalyst to outsized success.

Whichever is decided should align well with the investors goals for the future and their portfolio. More conservative investors may seek to minimize volatility and increase diversification where more aggressive investors opt for less. The downside, if we want to view it this way, would be lesser diversified investors would need to stay abreast of changes and respond quickly.

Personally, I prefer an over diversified approach which you’ll see from my portfolio here.

Dividend Kings, Champions, Aristocrats, Contenders, & Achievers

In order from best of the best to up and coming;

• Dividend kings – Have increased their dividend payment for 50+ years.
• Dividend champions – Have increased their dividend payment for 25+ years.
• Dividend aristocrats – Have increased their dividend payment for 25+ years and are in the S&P 500.
• Dividend contenders – Have increased their dividend payment for between 10 – 25 years.
• Dividend achievers – Have increased their dividend payment for 10 years.

Each of these respective groups have increased their dividend each year for the number of years listed. Not an easy accomplishment given the financial turmoil we’ve all experienced over the years. Nevertheless, these lists could serve as a nice starting point for investigating an investment opportunity.

Caution! – I would not view these lists as the be all end all. They completely neglect index funds, ETF’s, bonds, etc. and are instead only focused on the companies themselves. An easy oversight, and one that I have also made.

Uncle Sam and The Tax Bill

No investment philosophy discussion would be complete without taxes. Dividend growth investing isn’t a preferred strategy if taxes are to be avoided. Every dividend can trigger a potential tax event and opposition to dividend growth as an investment method will be sure to remind you about taxes frequently.

Still, an investor would be well served having familiarized themselves with the various account types available today. More than a few receive favorable tax treatment and others, like a Roth IRA, eliminate tax concerns entirely. Here is a site listing many of the different investment account types or you may speak with an existing brokerage to determine their unique account offerings.

For me, the approach to avoiding an outsized tax bill was to simply hold dividend payers in a Roth IRA account. An easy fix to otherwise uncomfortable trait of this investment style.

Downsides to Dividend Growth Investing

The downside to dividend growth investing will differ depending on where you look or who you ask. However, as I discussed in my dividend investing 101 article and as I’ve mentioned here, the greatest downside is subpar growth. Though the evidence suggesting this generally fails to properly evaluate the re-investment of dividends it must be considered before wading out into dividend growth waters.

Another area dividend growth investors must always be cognizant of is the health and stability of the dividend being paid. Companies can easily mis-step in one way or another or the market may change, rendering a product or service less desirable. In such a scenario, the dividend payment may become a question mark. For those seeking a stable portfolio with an actual growing dividend, a dividend cut is never welcome.

Under diversification is also a downside to the dividend growth investment method. Those seeking this style of investment would do well to account for this in the research and planning phase of an investment. With consideration given, not only to the current yield or to the dividend growth but also to the construction of an entire portfolio. A portfolio of assets able to withstand every market cycle, regardless the dividend growth, may be an under appreciated target.

In all, investing means an acceptance of risk and that risk can take many forms. Much of which is focused on choosing to invest in one place over another. The opportunity cost of dividend growth investing couldn’t truly be quantified but if history is any indication, those concerns may be unwarranted as cashflow is generated and re-investment occurs.

Dividend Cut, oh my!

The greatest pitfall to dividend growth investing, in my opinion, occurs when an asset unexpectedly lowers a dividend payment. Further, it isn’t uncommon for a struggling company to minimize their dividend upwards to 50% or more. Adding perspective, consider a company with a 3.5% dividend yield. Suppose troubled times strike and the payout ratio rises to 90%. In this scenario, the company is paying the majority of their earnings out as dividends. In this situation, the company will likely choose to eliminate some portion of their dividend. Hardly a recipe for a successful dividend GROWTH portfolio.

Consider also the negative sentiment you’ll experience having built a position up over years of dividend re-investment. Basically meaning, you wake up one day to find an income stream has been cut in half. An expected $10,000 dollar dividend payment turning to $5,000 could mean some very difficult life choices.

All together, while dividend cuts do happen they are possible to avoid. Careful planning around desired assets and an awareness of portfolio holdings would stave off most unwelcome surprises.

Final Thoughts

Dividend growth investing has proven time and again to be an investment philosophy worthy of consideration. The potential for a steady stream of growing passive income will likely always be a desirable characteristic amongst investors. Though, as with any investment approach, it’s imperative that an investor recognize potential hurdles and seek to avoid or remove them entirely.

Dividend growers may have historically outperformed the market but there is never a guarantee. A method I’ve personally adopted, is balanced mix of the different investing styles. I prefer an aggregation of growth investing, dividend investing, income investing, dividend growth investing, and value investing. I am however not an advocate of boundlessly moving from one style to another.

In all, dividend growth investing is hyper focused on a growing dividend. With mindfulness toward risk, investment objectives, and time horizons investors may equip themselves with a stable, recurring, and ever growing income stream. More than capable of lasting a lifetime.

Until next time.

God bless,

Jeff

<p>The post Dividend Growth Investing 101: Build Wealth Through Consistent Income first appeared on UQinvest.com.</p>