DGRO vs. VIG: iShares or Vanguard Dividend Growth ETF?

DGRO vs. VIG: iShares or Vanguard Dividend Growth ETF?

In retirement, people desire a growing passive income stream to offset rising healthcare and other costs. Inflation will take a bite out of your income each year. Your buying power is lower unless your income grows yearly at a pace greater than inflation. One great source of passive income is dividends from companies returning cash to shareholders. Asset managers have created excellent dividend growth exchange traded funds (ETFs) to make buying the best stocks easier. This article will compare DGRO vs. VIG as two likely dividend growth ETFs to add to your portfolio.

DGRO and VIG share several similar traits, and both are very popular, with tens of billions of dollars invested. But they have different pedigrees. They are from the two largest ETF fund managers, BlackRock and Vanguard, respectively. Hence, the main difference is the underlying indices for the iShares Core Dividend Growth ETF (DGRO) and Vanguard Dividend Appreciation ETF (VIG) differ. Consequently, although they follow a similar concept, they differ in some key characteristics.

Let’s discuss their profiles, similarities, and differences to help decide which dividend growth ETF you prefer to add to your portfolio.

Why Pick a Dividend Growth ETF?

As future retirees, it is a smart move to invest in ETFs with low expense ratios. It simplifies investing, gives investors more time to enjoy life, and helps their retirement portfolios grow. 

A dividend growth ETF allows a person to own dozens of dividend growth stocks as a part of one fund in their portfolio. That could mean holding Microsoft (MSFT), Pepsi (PEP), Visa (V), Procter & Gamble (PG), and other excellent stocks, but bought in a single ETF.

The essential thing to remember is that investing is simpler when comparing ETFs to stocks. You purchase one fund after researching it. You will not need to perform as much research on individual dividend stocks. In addition, diversification is instantaneous. If one company performs poorly, many other companies reduce the impact.

DGRO: iShares Core Dividend Growth ETF

DGRO is an iShares fund managed by BlackRock, the giant ETF firm from New York City. The fund tracks the Morningstar US Dividend Growth Index, containing American equities with a consistent dividend growth history. The stocks in the index have seen an annual increase in their dividends over a minimum of five straight years, meaning they are at least on the Dividend Challengers list. 

The DGRO fund is less than a decade old, with the inception year of 2014. A minimal expense ratio of 0.08%, meaning it costs $8 for every $10,000 invested. The low cost makes it an excellent ETF to add to a portfolio. The 30-Day SEC yield is 2.45%. In addition, the ETF has a growing dividend by owning growth and value stocks. 

The fund owns 447 holdings providing instant diversification across sectors and industries. However, it holds only 10 of the 11 sectors, excluding Real Estate. Total assets under management (AUM) are $25.07 billion, making the DGRO the second largest of the best dividend growth ETFs.

It has substantial assets allocated to the Financials, Healthcare, and Information Technology sectors. The three sectors combined make up more than half of the holdings at approximately 53.82%. Financials are cyclical, and Information Technology can struggle more than other sectors during a bear market. But healthcare stocks are often defensive, providing downside protection. But tech stocks, like Apple (AAPL) and Microsoft (MSFT), give DGRO a solid growth tilt.

The top 10 holdings of DGRO:

The top 10 holdings make up about 25.99% of the fund.

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Vanguard Dividend Appreciation Index Fund ETF (VIG)

The Vanguard Dividend Appreciation Index Fund ETF (VIG) is brought to us by Vanguard, founded by Jack Bogle. It is known for its low-cost index funds. The ETF seeks to track the performance of the S&P U.S. Dividend Growers Index. It has 289 holdings, focusing on companies that are Dividend Contenders, meaning they have increased the annual dividend for a minimum of ten consecutive years.

The VIG fund is older than DGRO, with an inception date of April 21, 2006. Like all Vanguard funds, it has an ultra-low expense ratio of 0.06%, costing $6 for every $10,000 invested. Low costs are essential for total returns over time. The 30-Day SEC yield is lower than DGRO at 1.92%. The VIG ETF owns value and growth stocks but has more of a growth tilt.

Total assets under management (AUM) are $80.2 billion, making the VIG the biggest dividend growth ETF. In addition, the VIG fund owns more large-cap growth stocks, like Microsoft (MSFT), Mastercard (MC), and Visa (V), in its top 10 holdings. Accordingly, VIG’s price increases when tech and growth are doing well, but the dividend yield is lower because these stocks lower yields.

The portfolio’s top three sectors are the same as DGRO, with about 22.90% in Information Technology, 15.60% in Healthcare, and 15.20% in Financials. The Consumer Staples and Industrials sectors round out the top five. The top three sectors have around 53.7% of total assets, similar to DGRO.

The top 10 holdings of SCHD:

The top 10 holdings make up about 29.12% of the fund.

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Similarities: DGRO vs. VIG 

Because DGRO and VIG are both dividend growth ETFs with an overlap in the top three sectors and top 10 stocks, they have several similarities. Both are excellent ETFs to own.

• Low-cost passively managed ETFs.
• Focus on dividend growth stocks.
• Continues to grow a passive income over the long haul.
• Similar top three sectors and percentages.

Although they have similarities, the differences between DGRO vs. VIG will assist in determining the correct dividend growth ETF to add to your portfolio.

Differences: DGRO vs. VIG 

Determining which dividend ETF to go with, you must first see if the differences align with your strategy. Some apparent differences would be:

• The expense ratio of DGRO is 0.08%, and VIG is 0.06%.
• DGRO has 447 holdings. VIG has 289 holdings.
• DGRO has $25.07 billion in assets. VIG has $80.2 billion in assets. 
• DGRO has a yield of 2.45%, and VIG has a yield of 1.92%.

Although both funds pursue a dividend growth investing strategy, they have differences, and there is no clear winner. The higher-yielding ETF is DGRO, helping with income. While the lower cost one is VIG, keeping costs down and not subtracting from returns. Also, VIG is more popular, with three times the assets.

Composition and performance may help decide between the two. 

Dividend Strategy

Both ETFs follow a dividend growth strategy of picking stocks with multiple years of dividend growth. The difference is in the number of years used as a qualifier. DGRO looks for only five years of dividend growth, while VIG requires ten years. The 5-year gap reduces the universe of stocks for VIG, possibly resulting in fewer holdings. 

Portfolio Composition

Besides the top ten stocks, the overall portfolio composition differs between DGRO vs. VIG. But, both DGRO and VIG emphasize similar sectors but with varying weightings. Also, both exclude the Real Estate sector and lightly weight Utilities. However, VIG holds almost no Energy stocks and underweights Utilities. It also likes Consumer Staples and Industrials more than DGRO, sectors that historically have dividend growth stocks. 

The Performance

The performance of these two funds is very similar. The DGRO ETF has a 5-year annualized total return of 10.17% and a cumulative total return of 62.27%. Since its inception in 2014, the cumulative total return has been 144.77%

The VIG ETF had an annualized total return of 10.34% and a cumulative total return of 63.56% over that same five-year period. Its cumulative total return was 326.44% since its inception in 2006. 

Comparing DGRO vs. VIG, if you were to put $10,000 into either of these ETFs, they would have similar price growth. 

DGRO vs. VIG: iShares or Vanguard Dividend Growth ETF?

Considering the composition, yield, expense ratio, and performance, it is hard to choose between the two ETFs because the differences are minor. If you like low expense ratios, VIG is a good choice because it is 25% lower with slightly better performance. On the other hand, DGRO is more diversified, with more stocks in the portfolio. However, VIG has a slight advantage over DGRO because it has been tested through more recessions and bear markets.

That said, selecting either ETF should be OK in the long run.

Disclosure: Long VIG

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Published at Tue, 21 Feb 2023 04:00:00 -0800