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 (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%).
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.
