Quiet Outperformance From an Overlooked Dividend ETF

Key Points

• With nearly 20% in returns in the last year and more than 5% year-to-date, DGRO is an ETF providing growth potential as well as strong dividend opportunities.
• The fund's strategy stands out for its emphasis on dividend growth history, helping to ensure that it avoids dividend yield traps and rewards companies with stability and healthy cash flow.
• DGRO provides broad exposure to nearly 400 names across many sectors and industries, with an emphasis on financials, health care, and information technology stocks.

When it comes to dividend stocks, it's easy to be tempted by companies based on a ranking of the highest dividend yields. After all, dividend yield is a direct measure of the cash payout a company provides for investors relative to its price, and the higher the yield the more enticing the distribution is, right? In actuality, there are other factors to consider when selecting dividend names, and investors attuned to the history of a dividend's growth—or lack thereof—may end up identifying more stable and successful investments.

Still, close monitoring of a potential dividend investment's history of payouts and growth can be difficult to manage for investors looking to trade quickly, and there always exists the risk that a company will face unexpected challenges and have to make cuts to its distributions. To diversify dividend investments, it may help to consider a dividend-focused exchange-traded fund (ETF), which not only holds a larger group of dividend-paying companies but also does the work of selecting and balancing the portfolio. For a broad view of the potent dividend growth space, consider the iShares Core Dividend Growth ETF NYSEARCA: DGRO.

Why DGRO's Angle on Dividend Stocks Stands Out

DGRO is a passively managed fund tracking the Morningstar US Dividend Growth Index, which targets U.S. equities that have both a history of dividend growth and the potential to sustain that growth going forward.

It does this by identifying (from a broader pool of U.S. stocks) companies that have at least five years of uninterrupted growth to their annual dividends, with an earnings payout ratio below 75%.

Interestingly, DGRO's index excludes companies in the top 10% of dividend yield before screening for dividend growth and payout ratio, perhaps a bid to avoid companies that falsely present a strong dividend case but are actually in trouble because their share price has collapsed.

In the end, DGRO holds roughly 400 positions in a set of companies broadly diversified by market capitalization and sector. The fund does lean toward financials stocks, health care names, and companies representing the information technology sector—together, these three categories represent about half of the total portfolio.

DGRO's Performance, Portfolio, and Prospects Set It Apart

In the last year, DGRO has returned about 13%, a standout in the dividend space, where companies most commonly deliver value to shareholders via disbursements, not share appreciation. Even as the broader S&P 500 has remained in negative territory to begin 2026, DGRO has returned more than 2% year-to-date (YTD). Of course, investors can also expect a strong dividend from the fund, with a yield of nearly 2% in early March.

Looking more closely at DGRO's portfolio, the fund takes a fairly broad view by not assigning any single position a very high portfolio weighting. Exxon Mobil Corp. NYSE: XOM, the massive energy firm and dividend aristocrat with a yield of 2.7% and a history of regular increases to payouts going back more than four decades, is the largest position, but it only occupies 3.6% of the portfolio. While most of the largest positions in DGRO's basket are indeed well-known dividend stocks, it also contains lesser-known firms for added diversification.

Big-name dividend plays are not necessarily a bad thing, as the emphasis on dividend growth can help to ensure that the companies DGRO holds are likely to be stable even during broader market upheaval. A brief look at some of the other top holdings finds solid dividend stalwarts like Johnson & Johnson NYSE: JNJ, AbbVie Inc. NYSE: ABBV, and Apple Inc. NASDAQ: AAPL.

For an annual fee of 0.08%, DGRO is not the absolute cheapest dividend fund on the market—the massive Vanguard Dividend Appreciation ETF NYSEARCA: VIG with over $100 billion in assets under management (AUM) is an example of an alternative that comes in below that rate, with an expense ratio of 0.04%. However, DGRO has beaten VIG on both overall returns and dividend yield in recent periods. DGRO is a smaller fund with just about $39 billion in AUM, but its one-month average trading volume of 2.3 million eclipses its larger rival as well.

To be sure, there are plenty of other dividend ETFs available for investors looking to set up a passive income stream with minimal investment action, and investors would do well to consider multiple options before making a selection.