Dividend growth stocks can be powerful investments. Hartford Funds and Ned Davis Research dug into the
data on stocks
based on their dividend policy. They found that over the past 50 years, dividend growers produced a higher total return with less volatility than companies that didn't increase their dividends regularly, those that cut or eliminated their payouts, and those that didn't pay dividends.
The outperformance
really
added up over the long term. A hypothetical $100 invested in
S&P 500
dividend growth stock
s in 1973 would have grown to nearly $15,874 by the end of 2024. However, a similar $100 investment made in companies that didn't increase their dividend would have only grown to $2,983, while $100 in dividend non-payers would have only been worth $899. Meanwhile, a $100 investment in dividend cutters and eliminators would have lost money and been worth only $63 at the end of this time frame.
Clearly,
investing in dividend growth stocks can be
a very powerful
strategy. However, managing a portfolio of dividend growers is easier said than done.
The good news is that many exchange-traded funds (
ETFs
) make investing in a strategy like dividend growth stocks easy. Two top options are the
Vanguard Dividend Appreciation ETF
(NYSEMKT: VIG)
and
iShares Core Dividend Growth ETF
(NYSEMKT: DGRO)
. Here's a closer look at which
dividend ETF
is better for investors who want to benefit from the power of dividend growth stocks.
Comparing the holdings
The
Vanguard Dividend Appreciation ETF
and the
iShares Core Dividend Growth ETF
each track an index that measures the performance of dividend growth stocks. However, there are some subtle differences that investors should consider.
The Vanguard Dividend Appreciation ETF tracks the
S&P U.S. Dividend Growers Index
, which aims to measure the performance of U.S. companies that have consistently increased their dividend every year for the past decade. It excludes the top 25% of the
highest-yielding dividend companies from the list. Currently, 338 companies are in the index.
Meanwhile, the iShares Core Dividend Growth ETF tracks the
Morningstar U.S. Dividend Growth Index
,
which provides exposure to companies with at least a five-year history of uninterrupted dividend growth and the capacity to continue increasing their dividends. The index excludes
REITs
and the top 10% highest-yielding
stocks. Currently, 408 stocks
make the cut
.
The funds remove the highest-yield stocks to avoid yield traps that, for example, have a high yield because of a crashing stock price.
The main goal of each index, and the ETFs that track them, is to hold the companies with the highest likelihood of increasing their dividends in the future. Here's a snapshot of their top holdings:
Vanguard Dividend Appreciation ETF
iShares Core Dividend Growth ETF
Broadcom
(4.2% of the fund)
Microsoft
(3.5%)
Microsoft
(4.1%)
JPMorgan Chase
(3.3%)
Apple
(3.8%)
Broadcom
(3.1%)
Eli Lilly
(3.7%)
ExxonMobil
(2.7%)
JPMorgan Chase
(3.6%)
Johnson & Johnson
(2.6%)
Visa
(3%)
Apple
(2.6%)
ExxonMobil
(2.4%)
AbbVie
(2.4%)
Mastercard
(2.4%)
Procter & Gamble
(2.2%)
Costco
(2.3%)
CME Group
(2.2%)
Walmart
(2.2%)
Home Depot
(2.1%)
Data sources: Vanguard and BlackRock.
Because the iShares Core Dividend Growth ETF only excludes the 10% highest-yielding dividend stocks instead of the top 25%, the fund has a higher dividend yield: 2.3% trailing-12-month yield compared to 1.8% from the Vanguard ETF.
Considering the fees
One of the many benefits of investing in ETFs is that they do all the work. In exchange, you pay the fund's manager a fee, known as the
expense ratio
. This cost can be well worth it for the ease ETFs provide in helping you achieve your investment strategy.
Vanguard is a pioneer in offering low-cost index funds to investors. It's always working to save investors money. It recently did that for investors in its Dividend Appreciation ETF by lowering the expense ratio to 0.05%. That makes it even cheaper than the iShares Core Dividend Growth ETF, which has a 0.08% expense ratio.
Put another way, for every $10,000 you invest in the Vanguard Dividend Appreciation ETF, you'd pay $5 in management fees each year. That compares to $8 for a similar investment in the iShares Core Dividend Growth ETF. While it might not seem like much, a few dollars in management fees each year can
really
add up over the decades.
Contrasting the returns
While the past doesn't guarantee the future, it's important to look back at a fund's performance to see how well its strategy has
done in delivering
returns for investors. Here's a look at the returns produced by these funds over the past decade:
Fund
1-Year
3-Year
5-Year
10-Year
Vanguard Dividend Appreciation ETF
11.14%
9.55%
13.05%
11.20%
iShares Core Dividend Growth ETF
8.84%
7.58%
16.36%
11.56%
Data source: Vanguard and BlackRock.
As that table shows, the Vanguard Dividend Appreciation ETF has delivered a stronger performance in recent years. Meanwhile, the iShares Core Dividend Growth ETF has performed better over the longer term, though its 10-year return is
only
slightly higher than Vanguard's.
Great ways to invest in dividend growth stocks
The Vanguard Dividend Appreciation ETF and the iShares Core Dividend Growth ETF focus on dividend growth stocks, which have proven to be winning long-term investments. Either fund would be a solid option for investors seeking to add these
powerful
wealth creators to their portfolios. The iShares ETF is better for those seeking a bit more income now (due to its higher yield), while the Vanguard fund has a lower fee structure, which enables its investors to keep more of the returns generated by the fund.
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Matt DiLallo
has positions in Apple, Broadcom, CME Group, Home Depot, JPMorgan Chase, Johnson & Johnson, Mastercard, and Visa and has the following options: short August 2025 $250 calls on Apple. The Motley Fool has positions in and recommends AbbVie, Apple, Costco Wholesale, Home Depot, JPMorgan Chase, Mastercard, Microsoft, Vanguard Dividend Appreciation ETF, Visa, and Walmart. The Motley Fool recommends Broadcom, CME Group, and Johnson & Johnson and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a
disclosure policy
.
