DGRW ETF: A Competitive Dividend Growth ETF With A Subpar 1.8% Dividend Yield

A long-time reader asked for my thoughts on the WisdomTree U.S. Quality Dividend Growth Fund ETF (NASDAQ:DGRW). DGRW invests in dividend-paying U.S. large-caps with good growth and quality. DGRW has comparable total returns to the S&P 500, with a marginally higher 1.8% dividend yield and marginally stronger dividend growth.

Overall the fund seems like a reasonable investment opportunity, and a buy. On the other hand, the fund is not an effective income vehicle, due to its low 1.8% starting yield. This is a significant negative, and, I imagine, a deal-breaker for many investors.

DGRW – Basics

• Investment Manager: WisdomTree
• Expense Ratio: 0.28%
• Dividend Yield: 1.77%
• Total Returns CAGR 10Y: 12.04%

DGRW – Overview

Index and Holdings

DGRW is an equity index ETF investing in dividend-paying U.S. large-caps with good growth and quality. The fund first selects large-cap dividend-paying U.S. equities, subject to a basic set of inclusion criteria. It then selects the 300 of these with the strongest growth, based on expected earnings growth, and quality, based on past ROE and ROA. Equities are weighted based on their aggregate cash dividends, measured in dollars, not yield. Larger companies tend to pay higher aggregate dividends, so this is akin to a modified market-cap weighting scheme.

DGRW’s underlying index is quite broad, which results in a reasonably well-diversified fund with investments in 300 companies from several industries. Diversification is a bit lower than average for an equity fund, with little exposure / underweight positions in communication services and energy. Materials and real estate weights are low too, but that is common for most equity funds. On the flipside, the fund is overweight consumer defensive.

Compare DGRW’s weights:

with those of the S&P 500:

Concentration is about average for an equity fund, with the funds top ten holdings accounting for 36% of its value. Largest holdings are all well-known blue-chips, including Microsoft (MSFT) and Coca-Cola (KO).

DGRW seems to hew quite closely to the S&P 500, with most of the fund’s holdings being index members:

and with 51% overlap by weight:

As a comparison, the Schwab U.S. Dividend Equity ETF (SCHD), one of the largest, most well-known dividend equity ETFs, only overlaps 11% with the S&P 500.

The Vanguard High Dividend Yield Index Fund ETF Shares (VYM), another similar fund, overlaps 32% with the S&P 500. Higher than SCHD, but still lower than DGRW.

DGRW’s portfolio is much more similar to the S&P 500 than that of most dividend ETFs. Performance and fundamentals should be more similar as well. Although this is not necessarily a positive or a negative, it is an important fact for investors to consider.

Dividend Analysis

DGRW tilts towards higher-yielding companies in two ways.

First, the fund only invests in dividend-paying companies, specifically excluding those without dividends. Broader equity indexes, including the S&P 500, do include companies that do not pay dividends, and so naturally have lower yields.

Second, fund holdings are weighted based on their aggregate cash dividends, measured in dollars. In general, large companies pay the most in aggregate dividends, but some with above-average yields do too. One can see this in DGRW’s portfolio. Largest fund holdings are mega-caps Microsoft and Apple, which pay significant dividends due to their size.

At the same time, some companies have large aggregate dividends due to their yields. These include Philip Morris (PM), a smaller company which is overweight due to its above-average 5.7% yield.

Although DGRW does tilt towards higher-yielding stocks, the impact of the above ends up being quite small. DGRW yields 1.8%, which is a bit higher than the yield on the S&P 500, but quite a bit lower than average for a U.S. dividend ETF. This is because the fund only barely focuses on companies with above-average dividends, and does so in very indirect ways.

Dividend growth seems good, with fund dividends growing at a 10.0% CAGR since inception. Growth seems to have stalled this year, with dividends decreasing by 2.6% these past twelve months. Ignore the 10Y dividend growth figure below, there was an issue with the calculation.

Although DGRW’s dividend growth has been reasonably good in the past, the fund’s starting 1.8% yield is simply too low of a starting base for a dividend growth fund. Even long-term investors receive little in income from the fund, with a 10Y yield on cost of only 4.6%. Even T-bills yield more than that now, and without having to wait a decade.

DGRW has higher yields on cost than the S&P 500, but lower than most of its peers, especially in comparison to SCHD.

DGRW has a higher yield and stronger dividend growth track-record than the S&P 500, something of a benefit for investors. Said benefit is quite small, especially in relation to peers.

As an aside, these results are consistent with the fund being much more similar to the S&P 500 than most other dividend funds. If the portfolio is similar, then so are the fundamentals, including yields.

Performance Analysis

DGRW’s performance track-record is quite strong, with the fund moderately outperforming most of its peers, slightly outperforming the S&P 500, since inception. Performance has been particularly strong since the pandemic ended, around mid-2020.

Risks seem slightly below-average too, with the fund seeing slightly outperforming most of its peers during 1Q2020, the onset of the coronavirus pandemic.

and experiencing lower volatility:

Although the results above are accurate, I think they overstate the consistency of DGRW’s outperformance. Fund returns do sometimes lag behind those of its peers and the market, as was the case from early 2018 to late 2021.

DGRW’s outperformance is remarkably easy to explain: the fund is very similar to the S&P 500, and said index has outperformed most dividend funds in the past. The flipside of this is that fund dividends are also quite similar to those of the S&P 500, so the fund yields a paltry 1.8%.

In my opinion, a fund with similar returns to the S&P 500 and a marginally higher yield is quite clearly a buy. S&P 500 total returns are strong, and higher yields are always an advantage.

On the other hand, a 1.8% dividend yield is quite obviously incredibly low, and the fund’s dividend growth track-record is not that strong either. For income investors, the fund is simply not a compelling choice. For these investors, SCHD offers roughly comparable returns, with a higher 3.7% dividend yield, and a stronger dividend growth track-record.

Conclusion

DGRW has comparable total returns to the S&P 500, with a marginally higher 1.8% dividend yield, and marginally stronger dividend growth. The fund is a buy, but not an effective income vehicle.