DGRO vs. DGRW: Battle of the Dividend Growth ETFs

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Dividend growth investing has proven to be an attractive investment strategy over time, and there are several strong ETFs that enable investors to invest in this theme. Two of the largest and most popular are the iShares Core Dividend Growth ETF (NYSEARCA:DGRO) and the WisdomTree U.S. Quality Dividend Growth Fund (NYSEARCA:DGRW). Both ETFs share a similar focus on high-quality dividend growth stocks and have performed well over the years.

I am bullish on both ETFs, but in this article, we will compare DGRO and DGRW to determine which could be the better choice for investors.

What Is the DGRO ETF’s Strategy?

According to iShares, DGRO invests in “an index composed of U.S. equities with a history of consistently growing dividends.”

iShares also touts the fact that DRGO “offers low-cost exposure to U.S. stocks focused on dividend growth” and says that DGRO enables investors to “access companies that have a history of sustained dividend growth and that are broadly diversified across industries.”

The fund launched in 2014 and has $27 billion in assets under management (AUM).

The Allure of Dividend Growth Investing

Dividend growth stocks may not feature the highest yields, but they grow their dividend payouts and are projected to do so in the future, which is a strong indicator of financial health.

Dividend growth stocks often offer a potentially attractive combination of returns from capital appreciation and dividend payouts. While their payouts may be lower than those of some high-yield dividend stocks, they often offer more growth potential than these high-yielding stocks, which may feature little in the way of growth or potential price appreciation.

To get a better understanding of why this strategy can be appealing, let’s take a look at a stock like Broadcom (NASDAQ:AVGO), which both funds hold, as we’ll discuss below.

While Broadcom only yields 1.4%, the company has increased its payout for 13 years in a row. The stock has returned an incredible 2,441% over the past 10 years on a total return basis, including capital appreciation and the reinvestment of the dividends it paid. While the yield may not be high, few investors would turn down that type of return.

What Is the DGRW ETF’s Strategy? 

DGRW has a similar focus. WisdomTree says that it invests in an index of “dividend-paying large-cap companies with growth characteristics in the U.S. equity market.”

DGRW predates DGRO, having debuted in 2013, and is smaller, with $12.8 billion in AUM, but it is still a major dividend ETF.

It gives investors “access to the current investment landscape of U.S. large-cap dividend growing companies by applying quality and growth screens.”

Head-to-Head Performance  

These are both good ETFs that have posted solid returns for investors over time. As of the end of May, DGRO has produced a three-year annualized return of 8.9% and an annualized return of 12.3% over five years.

For comparison, DGRW has produced an annualized return of 10.65% over the past three years and an annualized return of 15.47% over the past five.

Comparing the Portfolios 

DGRO offers investors great diversification, with positions in 419 different stocks. Furthermore, its top 10 holdings make up just 26.7% of assets, so it isn’t exposing investors to much concentration risk.

Below, you’ll find an overview of DGRO’s top 10 holdings using TipRanks’ holdings tool.

DGRO owns a mix of large-cap growth stocks like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) that pay dividends, coupled with more traditional dividend stocks like energy giants ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX).

DGRW is also well-diversified, although a bit less so than DGRO, and a bit more concentrated. DGRW owns 299 stocks, and its top 10 holdings account for 37.3% of the fund.

You can check out an overview of DGRW’s top 10 holdings below.

Like DGRO, DGRW owns a mix of large-cap growth stocks like Microsoft, Apple, Broadcom, and Nvidia (NASDAQ:NVDA) that pay dividends. These are mixed with more traditional longtime dividend stalwarts like Coca-Cola (NYSE:KO), Home Depot (NYSE:HD), Procter & Gamble (NYSE:PG), and Pepsi (NASDAQ:PEP).

The top holdings of both funds have a similar style in this regard, and there is plenty of overlap. In fact, Apple, Microsoft, Broadcom, Johnson & Johnson (NYSE:JNJ), Procter & Gamble, and AbbVie (NYSE:ABBV) all feature in the top 10 holdings for both funds.

TipRanks’ Smart Score system also takes a favorable view of each fund’s top holdings. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating. Eight out of DGRO’s top 10 holdings feature Outperform-equivalent Smart Scores of 8 or above, and eight out of DGRW’s top 10 holdings feature Outperform-equivalent Smart Scores.

DGRO enjoys an Outperform-Equivalent ETF Smart Score of 8 out of 10, and DGRW has the same rating. All in all, these two funds are on pretty even footing when it comes to their holdings.

Dividend Yields 

With both funds boasting solid performance track records in recent years and highly-rated portfolios, there isn’t too much separating them. However, dividend yield is one area where one has a discernible advantage over the other. While DGRW yields just 1.6%, DGRO’s yield comes in higher at 2.3%, making it the clear choice in this category.

Now, you may be thinking that neither of these yields sounds that great. And while they aren’t particularly high, it’s important to remember that these aren’t necessarily high-yield dividend funds. They are focused on dividend growth and a combination of returns from both dividends and capital appreciation, and they have been effective in this regard, as we saw in the total return section.

Plus, the dividends of the stocks these funds focus on are expected to grow over time, so while the yields aren’t particularly high, investors can reasonably expect the levels of the dividend payouts to increase over time.

Fee Comparison

The other area where DGRO pulls away from DGRW is when it comes to their fees. To be clear, both ETFs are very reasonable in this department, but DGRO’s 0.08% expense ratio is much lower than DGRW’s 0.28%. These expense ratios mean that an investor putting $10,000 into DGRO will pay $8 in fees annually, while an investor in DGRW will pay $28.

Again, these are both reasonable numbers, but DGRO has the clear advantage. The discrepancy between the two also becomes more pronounced over time. Assuming that each fund maintains its current expense ratio and gains 5% per year going forward, the investor in DGRO will pay just $103 in fees over 10 years, while the investor in DGRW will pay $356.

We Have a Winner

These are both similarly focused funds with strong portfolios of highly-rated dividend growth stocks and solid track records of performance. While both are likely good choices for investors, I’m more bullish on DGRO and choose it as the winner in this comparison between these two high-powered ETFs because of its higher yield and lower expense ratio.

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