Top Dividend Growth ETFs Ranked For The Rest Of 2021

Vanguard, State Street and ProShares top the list as expected, but MBOX, RDVY and PFM are also nice options.
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Dividend ETFs haven't necessarily had the best 2021. After outperforming the S&P 500 during the first five months of the year, sentiment has shifted back to mega-cap growth and tech. All of the major dividend ETFs across all strategies - dividend growth, dividend quality and high yield - are now trailing the large-cap benchmark year-to-date by between 2% and 6%. With the Fed's actions over the past few years, this shouldn't be surprising. The trillions of dollars in stimulus payments and a persistent zero interest rate environment have made conditions ideal for growth stocks to lead.

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But the long-term track record of dividend growers is undeniable. This notion has become overshadowed in the last few years since the market has been dominated by the big growth names and almost nothing else, but history shows that dividends typically comprise a large portion of an investor's total return.

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The 2010s experienced one of the smallest dividend contributions to total return going back to the 1940s, but if you look all the way back until 1930, studies have shown that more than 40% of returns have come from dividends. Investors want to load up their portfolios with growth stocks today, but it would be a mistake to avoid dividend stocks in your portfolio regardless of your age or where you are in your savings cycle.

A similar multi-decade historical look shows that, on average, even the worst-performing dividend payer group has outperformed those stocks that don't pay dividends at all.

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Even better is the fact that dividend stocks often come with superior risk-adjusted returns as well. Since dividend payers are usually more mature companies with stronger cash flows and healthier balance sheets, they're less exposed to the market swings that can come with more speculative investments.

Dividend growth stocks, those from companies who have long histories of not just paying but growing their dividend every year, are an especially attractive group. The predictability of income generation from this segment of the portfolio along with the fact that shareholders are likely to get a pay raise every year make them highly desirable within the income seeking community.

There are a lot of solid dividend growth ETFs as well if you don't want to subject yourself to the research and work that can be involved in picking individual stocks. Companies, such as Vanguard and State Street, offer very diversified portfolio at rock bottom fees that can make great portfolio cornerstones, but smaller issuers, such as Invesco, First Trust and ProShares, offer attractive choices as well.

Let's lay down the foundation for these ETF rankings.

Ranking The Dividend Growth ETFs

The variety of choices makes distinguishing the best from the rest a little challenging. You've probably heard most financial pundits talk about focusing on funds with low expense ratios. That can certainly be a big factor in deciding which ETF to go with (it's probably the most important factor, in my view), but there are a lot of things that could go into make the right choice.

That's where I'm going to try to make things easier for you. Using a methodology that I've developed which takes into account many of the factors that should be considered and weighting them according to their perceived level of importance, we can rank the universe of available ETFs in order to help identify the best of the best for your portfolio.

Now, this certainly won't be a perfect ranking. The data, of course, will be objective, but judging what's more important is very subjective. I'm simply going off of my years of experience in the ETF space in helping investors craft smart, cost-efficient portfolios.

Methodology And Factors For Ranking ETFs

Before we dive in, let's establish a few ground rules.

First, all of the data is used is coming from ETF Action. They have gone through the ETF universe to identify those ETFs using a dividend growth equity strategy. There are currently 23 that qualify and we'll be using their categorization as a starting point. Many thanks to them for opening up their vast database for my use.

Second, let's run down the factors I used in the ranking methodology.

  • Expense Ratio - This is perhaps the most important factor since it's the one thing investors can control. If you choose a fund that charges 0.1% annually over a fund that charges 1%, you're automatically coming out ahead by 0.9% annually. You can't control what a fund returns, but you can control what you pay for the portfolio. Lower expense ratios equal more money in your pocket.
  • Spreads - This relates to how cheaply you can buy and sell shares. Generally speaking, the larger the fund, the lower the spreads. Bigger funds usually have many buyers and sellers. Therefore, it's easier to find shares to transact and that makes them cheaper to trade. On the other hand, small funds tend to trade fewer shares and investors often need to pay a premium to buy and sell. Considering expense ratios and spreads together usually give you a better idea of the total cost of ownership.
  • Diversification - Generally speaking, the broader a portfolio is, the better chance it has at reducing overall risk. A fund, such as the Energy Select Sector SPDR ETF (XLE), provides a good example. 45% of the fund's total assets go to just two stocks - ExxonMobil and Chevron. By buying XLE, you're putting a lot of faith in just those two companies. An equal-weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), would score higher on diversification than XLE.
  • FactSet ETF Scores - FactSet calculates its own proprietary ETF ranking for efficiency, tradeability and fit. They basically are designed to tell us if an ETF is doing what it sets out to do. I'm not going to copy and paste that work that they're doing, but there is some influence there to make sure my rankings are on the right path.

There are a few other minor factors thrown into the mix, but these are the main factors considered.

One thing that is not considered is historical returns. Most ETFs are passively-managed and are simply trying to track an index, not outperform. ETFs shouldn't be penalized for low returns simply because the index they're tracking is out of favor at the moment.

I'm ranking ETFs based on more basic structural factors. Are they cheap to own? Are they liquid? Do they minimize trading costs? Do they maintain risk-reducing diversification benefits?

Being in the bottom half of the list doesn't automatically make a fund "bad". It simply means that due to a low asset base, a high expense ratio, a concentrated portfolio or some other factor, it poses additional costs or downside risks.

Top Dividend Growth ETF Rankings For 2021

There are five dividend growth ETFs that are significantly larger than the rest, capped off with the monolith Vanguard Dividend Appreciation ETF (VIG) at the top. Since the most popular ETFs are usually the low cost leaders and their sheer size allows trading costs to be razor thin, the large ETFs tend to rise to the top of these rankings.

You'll see that's the case here when I use my ranking methodology to put all 23 dividend growth ETFs through the algorithm.

Top Dividend Growth ETF Rankings

Top Dividend Growth ETF Rankings

VIG captures the #1 spot on this list and it's easy to see why. Its 0.06% expense ratio is by far the lowest in this category and it's also got the lowest trading costs, making it highly efficient and tradeable. At $63 billion in assets, it's also by far the biggest fund in this category and many investors use it as the core of their dividend portfolios. The 1.5% trailing 12 month dividend yield won't necessarily get investors too excited, but VIG, according to my ranking system at least, does it better than anyone else. The international version of this strategy, the Vanguard International Dividend Appreciation ETF (VIGI) comes in at #5 here.

The ProShares trio of dividend aristocrat/growers ETFs - the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), the ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL) and the ProShares Russell 2000 Dividend Growers ETF (SMDV) - all occupy top 10 positions. The requirements for qualifying for these funds get looser as the companies get smaller - NOBL requires a 25-year growth record, REGL requires 15 years and SMDV requires just 10. These funds are often considered the "go-to" ETFs for straight dividend grower exposure without any frills. Their expense ratios between 0.35% and 0.41% are a tad on the high side, which prevents them from higher up these rankings.

The First Trust Rising Dividend Achievers ETF (RDVY) is an interesting option if you're looking for a tad more growth in your dividend strategy. It requires companies have a comparatively modest 5-year dividend growth streak, but also makes sure they meet a number of dividend quality benchmarks, such as payout ratio, cash-to-debt and earnings, to help ensure the company can keep growing the dividend into the future. The short minimum growth streak allows more emerging names, including several in the tech space, to qualify for the portfolio giving it a bit more of a growth tilt.

The Freedom Day Dividend ETF (MBOX) is the highest-ranked "come out of nowhere" kind of fund on this list. This fund is actively-managed and, like RDVY, uses a number of fundamental and quantitative metrics, such as cash flows, dividend histories, valuation metrics, earnings ratios in order to identify companies that have the ability to make multiple dividend increases well into the future. The fund doesn't require a minimum dividend growth history in order to qualify and evaluates stocks based solely on their future dividend growth potential. MBOX generally holds between 30-50 stocks at a time and generally underweights higher yielders in order to provide an extra degree of stability. It was launched just in May of this year and has a modest $27 million in assets, but it looks like it's already off to a solid start.

Other funds I generally like on this list include the Invesco Dividend Achievers ETF (PFM) and the ProShares S&P Technology Dividend Aristocrats ETF (TDV).

The SoFi Weekly Dividend ETF (WKLY) is a bit of a unicorn and deserves a mention. According to the company, qualifying stocks must have "maintained their dividend payments over the last 12 months, been forecasted to continue to pay over the next 12 months, and have met a number of additional screens designed to remove companies at risk of reducing their dividend payouts". The gimmick, of course, is that the fund pays a fixed $0.02 per share dividend every Thursday to appeal to those folks who want a predictable paycheck every week. The fixed nature of the distribution requires a bit of forecasting and maintenance since most stocks only pay their dividends quarterly. It's an interesting idea, but so far has gained little interest.

The funds in the bottom half of the list aren't necessarily bad funds, but most suffer from one of two things - they're internationally focused, which tend to come with higher expense ratios and get dinged especially hard when low cost is advantageous, or have tiny asset base, which can make trading excessively costly. The idea of Europe, international or emerging markets dividend growers adds some nice diversification potential to the portfolio, but most of them, with the notable exception of VIGI, are too small to really be investable at the moment.

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