History Says You'll Want to Buy 1 of These Top ETFs and Never Look Back
Key Points
The Schwab U.S. Dividend Equity ETF holds 100 high-yielding dividend growth stocks.
The iShares Core Dividend Growth ETF holds stocks that have increased their dividend for at least five straight years.
The Vanguard Dividend Appreciation ETF holds companies that have delivered at least a decade of dividend growth.
Hartford Funds and Ned Davis Research dug into the historical data on dividend stocks by their policy. They found that over the last 50 years, dividend growers and initiators in the S&P 500 have delivered significantly higher total returns (10.2% annualized) than companies that didn't increase their dividends (6.8%) or that don't pay dividends (4.3%). This historical data suggests you'll want to invest in dividend growth stocks.
Buying exchange-traded funds (ETFs) is an easy way to invest in dividend growers. Here are three top options to consider.
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The Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) tracks an index (Dow Jones U.S. Dividend 100 Index) that measures the performance of 100 high-yielding dividend stocks with consistent records of paying dividends. It screens companies based on their dividend yield, five-year dividend growth rate, and financial strength relative to their peers.
Dividend yield is certainty an important aspect of the Schwab U.S. Dividend Equity ETF. The fund's trailing 12-month dividend yield is 3.3%, nearly triple the S&P 500's level of 1.2%.
However, dividend growth is equally important. Over the last five years, its holdings have grown their dividends at a more than 8% compound annual rate. That's higher than the S&P 500's 5% dividend growth rate during that period. The fund's focus on dividend growth stocks has really paid off over the years. It has delivered an annualized total return of more than 11% over the past one-, three-, five-, and 10-year periods, as well as since its inception in 2011 (13.3%).
iShares Core Dividend Growth ETF
The iShares Core Dividend Growth ETF (NYSEMKT: DGRO) also tracks an index of companies with a history of dividend growth (Morningstar U.S. Dividend Growth Index). It starts by screening companies that have increased their dividends for at least five straight years. It then weeds out companies that analysts don't expect to deliver positive future earnings growth, since that's a key to sustainable dividend growth. It also excludes companies with high dividend payout ratios (over 75%) and yields (10% highest yields), since they tend to be at higher risk of dividend reductions. The net result is that the iShares Core Dividend Growth ETF holds nearly 400 stocks, providing even more diversified exposure to dividend growth stocks.
Since yield isn't a key determining factor, the ETF has a lower yield (2% over the last 12 months). However, it has a strong record of delivering robust total returns. Like the Schwab U.S. Dividend Equity ETF, it has delivered at least an 11% annualized total return over the past one-, three-, five-, and 10-year periods, as well as since its inception in 2014 (11.9%).
Vanguard Dividend Appreciation ETF
Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) also tracks an index of dividend growth stocks (S&P U.S. Dividend Growers Index). To qualify, a company needs to have increased its dividend for at least 10 consecutive years. However, it excludes real estate investment trusts (REITs) and the top 25% of companies with the highest yields. Those exclusions help reduce the likelihood that a holding will cut its dividend. However, it also causes the Vanguard Dividend Appreciation ETF to have a lower yield (1.6% over the last 12 months).
More than 335 companies currently meet the index's criteria, providing the fund with broad diversification. The ETF also has a strong record of delivering attractive total returns for investors. It has delivered an annualized total return of more than 10% over the past one-, three-, five-, and 10-year periods, as well as since its inception in 2006 (10.1%).
Three ways to win
SCHD, DGRO, and VIG all focus on investing in high-quality dividend growth stocks. That strategy has paid off for their investors over the years. Their approach should continue to deliver strong returns for investors going forward, given the historical returns of dividend growers. That's why you likely won't regret buying at least one of these ETFs.
Should you buy stock in Schwab U.S. Dividend Equity ETF right now?
Before you buy stock in Schwab U.S. Dividend Equity ETF, consider this:
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Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
