The Best Dividend Growth ETF on the Market (one of my largest holdings)

Welcome to this “special edition” on great dividend-growth investments. Today’s feature focuses on dividend growth ETFs.

What Is an ETF?

An ETF is a fund of companies rather than an individual company.

The initials describe it further:

  • “ET” stands for “exchange-traded.” In other words, an ETF’s shares trade on exchanges throughout the day, just as stock shares trade.
  • “F” stands for “fund.” An ETF is made up of multiple holdings. It is, in essence, a ready-made portfolio.

Unlike conventional mutual funds, ETF shares are bought and sold throughout the day on stock exchanges, whereas mutual fund shares are purchased from or sold back to the fund company based on their price at the end of each trading day.

In short, ETFs trade just like stocks. The instantaneous prices of ETFs are kept in line with the total value of their assets by behind-the-scenes mechanisms that we won’t get into.

Suffice it to say that the price of the ETF will generally match the NAV (net asset value) of the assets that it owns. As those assets’ prices change during the trading day, the ETF’s price changes accordingly.

ETFs have been around since 1993. The first one provided a simple way for an investor to buy the entire S&P 500 index in a single fund. Today, most ETFs are still based on indexes, but the universe of indexes has moved far beyond traditional market barometers like the S&P 500.  Indeed, nowadays many indexes are created specifically to provide a portfolio for an ETF to track. Each ETF holds the same securities, in the same proportions, as the index upon which it is based.

From their start nearly 30 years ago, today there are more than 160 issuers of ETFs, more than 7600 ETFs available worldwide (2200 in the USA), and their combined assets top $7 trillion (source).

Obviously, ETFs are very popular. When first introduced, ETFs were viewed as a sideshow, but their spectacular growth has changed that. Recent estimates are that ETFs account for more than 25%-30% of market trading.

Can You “Do” Dividend Growth Investing via ETFs?

Today’s underlying indexes for ETFs follow themes, strategies, sectors, and so on. It’s not unfair to say that ETF and index providers are looking for anything that will sell.

From my research, about 140 ETFs are devoted to dividend stocks or involve a dividend-centric strategy in one way or another. I believe that one can follow a reasonable DG strategy via ETFs. Certainly, a portion of any DG portfolio can be comprised of ETFs in addition to individual stocks.

I have been studying dividend ETFs for more than eight years. My interest was inspired by a practical question: What if I die? How would my wife’s and my investments – which are mostly DG stocks – be managed?

An obvious possible answer to that question would be to replace some or all of the stocks with ETFs. Theoretically, ETFs – which are professionally managed themselves – could come close to replicating the results I get from individual DG stocks.

So my search through the ETF world has been motivated by wanting to find ETFs that invest more or less the way I invest: High-quality dividend growth stocks, with an emphasis on growing income prevailing over an emphasis on sheer growth.

Special Circumstances about ETF Dividends

Now let’s focus on the dividend aspects of ETFs. We need to understand a few facts about the dividends that ETFs pay.

First, ETF dividend payout amounts vary from quarter to quarter. Unlike a dividend growth stock that pays a steady dividend each quarter for a year and then raises it, ETF distributions change every quarter.

Here’s what I mean. This is a 10-year chart showing Johnson & Johnson’s dividends (in purple) and the dividends paid by a Dividend Aristocrats ETF (in orange).

Johnson & Johnson’s (JNJ) dividend looks like a staircase, showing one increase per year, then steady payouts for the next three quarters, followed by the next increase. That pattern hasn’t varied for more than 50 years.

In contrast, the dividend line for the ETF jumps around from quarter to quarter. It does appear to trend generally upwards, but it is impossible to tell at a glance whether every year’s total is more than the prior year. To determine that, you have to add up the individual amounts, quarter-by-quarter and year-by-year.

Because of their variable payouts, one can only judge whether an ETF’s dividend is steadily growing by looking at 12-month periods. For this article, I use calendar years, with the last full year being 2020.

Second, an ETF’s yield cannot be calculated by annualizing the most recent payout and dividing by price. That’s the way it is done for stocks, but it doesn’t work for ETFs, because the varying quarterly amounts cannot be extrapolated into sensible annual amounts.  You get wildly varying annual estimates after each quarter’s dividend.

So for ETF yields, I use the last 12 months of payments divided by current price. That is a standard way to gauge an ETF’s yield. This method is often called “TTM yield,” where TTM stands for trailing twelve months.

Note that this tends to understate the actual yield one will experience over the next 12 months if the annual dividend trend is up. But there’s no better way to do it.

Finally, ETFs frequently declare a dividend near the end of the year, but its payable date is not until early the following year (say in the first week of January).

It is nearly universal practice among data providers to “assign” such dividends to the year in which their ex-dividend date falls, rather than the actual year of payment. That removes noise from the data and accurately reflects whether a dividend ETF is raising its dividend each year.

A Survey of Top Dividend ETFs

I have boiled the 140+ dividend ETFs down into the following table of 11 to try to focus in on the top ETFs to consider for core DG investors. The table includes these dividend ETFs only:

  • ETFs that have more than $4 billion in assets under management; OR
  • A 5-year streak of annual dividend increases.

The table is ordered by the number of years that each ETF has grown its dividend without a cut.

Which ETF Is the Best for Dividend Growth Investors?

Which ETF is the best?

This is a “gotcha” question. As all experienced investors know, no single security is best for everyone.

That said, we can go through the table and single out some positive and negative qualities. The source for most of the data in this section is Simply Safe Dividends.

Positive: Growth streak 5+ years

The oldest dividend-oriented ETFs were started in the early 2000s. Just two, however, have managed to attain 10 straight years of dividend growth. If they were stocks, that would make them Dividend Contenders:

  • Schwab U.S. Dividend Equity (SCHD) – 10 years
  • Vanguard High Dividend Yield (VYM) – 10 years

If, like me, you don’t consider a stock to be a “dividend growth” stock unless it has delivered at least five straight years of dividend growth, four other ETFs would make the grade:

  • Invesco High Yield Equity Dividend Achievers (PEY) – 7 years
  • iShares Core Dividend Growth (DGRO) – 7 years
  • Vanguard Dividend Appreciation (VIG) – 7 years
  • First Trust Value Line Dividend (FVD) – 5 years

            Positive: Never cut

Only two of our survey sample have never cut their annual dividend:

  • Schwab U.S. Dividend Equity (SCHD) – never cut
  • iShares Core Dividend Growth (DGRO) – never cut

Negative: Multiple dividend cuts

A surprising number of the ETFs have had multiple dividend cuts in their lifetimes. The ETFs with three or more cuts since inception are:

  • SPDR S&P Dividend (SDY) – 6 cuts since 2005 inception
  • Invesco High Yield Equity Dividend Achievers (PEY) – 4 cuts since 2004
  • iShares Select Dividend (DVY) – 4 cuts since 2003
  • First Trust Value Line Dividend (FVD) – 3 cuts since 2003

Positive: Higher yield

None of the ETF’s are truly high-yield, which I define as 4%+. The five highest yielders in the table are:

  • iShares Core High Dividend (HDV) – 3.7%
  • Invesco High Yield Equity Dividend Achievers (PEY) – 3.6%
  • Vanguard High Dividend Yield (VYM) – 2.9%
  • Schwab U.S. Dividend Equity (SCHD) – 2.8%
  • SPDR S&P Dividend (SDY) – 2.6%

Positive: Fast dividend growth         

Five ETFs have double-digit DGRs over the past five years:

  • ProShares S&P 500 Dividend Aristocrats (NOBL) – 17% per year
  • Schwab U.S. Dividend Equity (SCHD) – 12% per year
  • Invesco High Yield Equity Dividend Achievers (PEY) – 10% per year
  • iShares Core Dividend Growth (DGRO) – 10% per year
  • WisdomTree U.S. Dividend Growth (DGRW) – 10% per year

Positive: Low expense ratios

Reasonable minds can differ about the importance of expense ratios. After all, the performance you get is determined after fund expenses have been paid.

Nevertheless, I prefer low expense ratios, especially with dividend ETFs, because the expense ratio comes right off your yield. If the stocks in an ETF portfolio yield 3.0% altogether, but the ETF charges 0.50% in expenses, the ETF’s yield to you falls to 2.5%. The impact of the expense ratio is direct and it impacts your income.

The dividend ETFs include five with very low expense ratios (under 0.1%):

  • Schwab U.S. Dividend Equity (SCHD) – 0.06%
  • Vanguard High Dividend Yield (VYM) – 0.06%
  • Vanguard Dividend Appreciation (VIG) – 0.06%
  • iShares Core Dividend Growth (DGRO) – 0.08%
  • iShares Core High Dividend (HDV) – 0.08%

Negative: High expense ratios

At the other end of the scale, several have expense ratios more than 4x the above:

  • First Trust Value Line Dividend (FVD) – 0.70%
  • Invesco High Yield Equity Dividend Achievers (PEY) – 0.52%
  • SPDR S&P Dividend (SDY) – 0.35%
  • ProShares S&P 500 Dividend Aristocrats (NOBL) – 0.35%

The last ETF listed there – NOBL – illustrates the pernicious effect of high expense ratios. NOBL holds the Dividend Aristocrats, and the ETF’s indicated yield is 2.4% per its underlying index’s factsheet. But the ETF’s yield is 1.9%. While a small part of that difference may be due to estimating the yield forward rather than backward, most of it is due to the ETF’s 0.35% expense ratio.

Positive: Morningstar Gold, Silver, and Bronze ratings

Morningstar analysts rate ETFs based on five “pillars”:  Process, Performance, People, Parent, and Price. A fund that receives a medalist rating of Gold, Silver, or Bronze is expected to outperform similar funds over a full market cycle. The rating is not a short-term market call, but instead attempts to provide a forward-looking perspective on a fund’s abilities.

These ETFs have positive Morningstar analyst ratings:

  • Vanguard High Dividend Yield (VYM) – Gold
  • Schwab U.S. Dividend Equity (SCHD) – Silver
  • iShares Core Dividend Growth (DGRO) – Silver
  • Vanguard Dividend Appreciation (VIG) – Silver
  • SPDR S&P Dividend (SDY) – Silver
  • First Trust Value Line Dividend (FVD) – Bronze

Negative: Morningstar Negative rating

One fund gets a Negative rating from Morningstar: iShares Core High Dividend (HDV).

Scoring the ETFs

To integrate the positive and negative characteristics, I created a simple plus/minus score, like in hockey. I counted +1 for positive factors and -1 for negative factors.

Here are the results:

Schwab U.S. Dividend Equity (SCHD) +6

iShares Core Dividend Growth (DGRO) +5

Vanguard High Dividend Yield (VYM) +4

Vanguard Dividend Appreciation (VIG) +3

WisdomTree U.S. Dividend Growth (DGRW) +1

iShares Core High Dividend (HDV) +1

Invesco High Yield Equity Dividend Achievers (PEY) +1

First Trust Value Line Dividend (FVD) -0-

ProShares S&P 500 Dividend Aristocrats (NOBL) -0-

SPDR S&P Dividend (SDY) -0-

iShares Select Dividend (DVY) -1

And the Winner Is: Schwab U.S. Dividend Equity ETF (SCHD)

To my way of thinking, one ETF stands above the others for a basic or core dividend-growth ETF: Schwab’s U.S. Dividend Equity ETF (SCHD).

If it were a stock, SCHD would be a “Dividend Contender” with its 10-year record of dividend growth, which is tied for longest among all the dividend-oriented ETFs. It is one of only two in the table to have never cut its dividend from year to year.

SCHD, introduced in 2011, has a decent mid-range yield of 2.8% to go along with a fast growth rate for that level of yield. Its 5-year DGR is 12% per year.

SCHD is also the highest total-return DG ETF over the past five years. My simple scoring system focused on quality and income, and it did not consider total return, but here are the 5-year total returns of the top-four scoring ETFs. SCHD is in purple.

This data is from YCharts “total return price” function, so it includes price + dividends + dividend reinvestment. The returns are not annualized, they are the total returns over the past five years.

SCHD Under the Hood

We have seen that SCHD has a lot of positive qualities and has performed well. How does it achieve its high standing?

SCHD’s underlying index is the Dow Jones U.S. Dividend 100 Index (DJUSDIV). Per its Factsheet, that index is designed to measure the performance of high-dividend-yielding stocks in the USA with a record of consistently paying and raising their dividends.

The index takes an approach that is similar to my own DG approach. It focuses on company quality, fundamental strength, dividend sustainability, and decent yields.

It requires stocks to have paid dividends for a minimum of 10 consecutive years, and it ranks stocks by a score calculated from four fundamentals:

  • the ratio of cashflow to total debt
  • return on equity (ROE)
  • dividend yield
  • five-year dividend growth rate

While those screens are simple and fewer than I use myself, they definitely help to select businesses that tend to be well-managed companies, from both capital structure and operational perspectives.

Another thing that I like about SCHD’s index is its weighting method. Each stock is capped at 4% of the portfolio and each sector at 25%. These attributes help the portfolio attain diversification.

The index is rebalanced annually in March. Turnover in the portfolio is slowed down by “buffer rules” that favor the retention of current constituents during the annual review. To be specific, stocks already in the index remain there as long as they are among the top 200 as ranked by the composite score. I like that, as I favor low turnover and small churn rates. SCHD’s turnover in the past year was 43%, which is higher than usual.

Stocks in the index are weighted quarterly, and the index is reconstituted annually. SCHD is subject to a daily weight check in case its largest positions get way out of control. I could not determine if this has ever been applied.

As of the end of March, the index had an “indicated yield” of 3.2%, which suggests that it attempts to be a forward projection, although no clue is given as to how that was computed. We saw earlier that SCHD’s TTM yield is 2.8%. Remember that the TTM number tends to understate the yield that the investor will actually get for an ETF with generally rising dividends.

What Is in SCHD’s Portfolio?

By rule, the index contains 100 stocks. All the companies are US-based. There are no REITs. All companies must have at least 10 consecutive years of dividend payments. The actual weight of the top constituent is 4.5%, and the combined weight of the top 10 is 41%.

Here are the sector weights of the index. We can see that SCHD is currently heavy on Financials, Information Technology, Industrials, Consumer Staples, and Health Care.

The following chart is a little dated (2019), but it shows how the portfolio’s composition by sector has changed over the years. Even though the index’s rules are designed to slow down turnover, they do not prevent the portfolio from significantly shifting over time.

For example, the tech sector (dark green) has gone from practically no representation in 2005 to its current weight of almost 17%. Moving in the other direction has been the utility sector (purple), which went from 25% of the portfolio in 2001 to 0% today.

Consumer staples (gold) and consumer discretionary (dark blue) stocks have been fairly consistently represented over the years.


Here is Morningstar’s style box that shows the portfolio’s holdings by size and investment style.


Obviously, SCHD’s stock-selection methods result mostly in large-value and large-core companies, with no stocks at all registering in the pure growth category.

SCHD’s tilt toward quality is shown by this display from Morningstar. No fewer than 83% of SCHD’s stocks have either Wide or Narrow Moat ratings.

The chart also shows the above-average Financial Health and Profitability grades awarded to SCHD’s portfolio. All of these factors point to a portfolio made up of high-quality companies.

The following table displays SCHD’s top 17 stocks by weight. I chose this cutoff, because it represents all of the stocks that occupy 2.5% or more of the 100-stock portfolio. In total, these 17 stocks comprise 64% of the portfolio’s market cap.

Looking to the far-right column, notice how all of these highly-weighted stocks have either a Wide or Narrow moat rating – again reflecting the portfolio’s quality.

I put a red dot next to the stocks that I own in my Dividend Growth Portfolio. I own nine of SCHD’s top 17. That suggests to me both a similarity in process, but enough of a difference that adding SCHD to my own portfolio would increase my diversification to some degree. My portfolio, for example, has no financial stocks, while that currently is SCHD’s largest sector at more than 20%.

SCHD’s Dividend Performance

We saw earlier that SCHD is on a 10-year streak of increasing its dividend, and it is one of only two ETFs in my survey that has never cut its dividend.


The above chart shows SCHD’s smooth annual dividend growth. As we saw earlier, ETF dividends vary from quarter to quarter, and SCHD is no exception. We see the quarterly variations in this chart:

SCHD’s yield has varied over time, of course, moving inversely to its price and being helped along every time the dividend is raised. This 5-year chart compares SCHD’s yield (purple) to the S&P 500 (represented by the ETF SPY, orange).

My eyeball tells me that SCHD’s average yield over the past five years has been about 2.9%. The peak yield (above 4%) in 2020, of course, coincides with the Covid crash last year.

SCHD’s Total Return Performance

After a mediocre first few years, SCHD has ranked in the top 2% of all large-value funds over the past five years. The following chart compares SCHD to SPY (S&P 500). It includes the impact of reinvesting dividends.


Valuation for an ETF depends on the valuations of the stocks in it, as well as the ETF’s current yield compared to its historic yield.

It would be way too much work to go through every stock in a 100-stock ETF and concoct individual valuations. I have a few shortcuts.

First, the table above of the largest 17 positions in SCHD shows Morningstar’s star ratings for each stock. Those are valuation judgments, one through five stars. I took a simple average, and the average star ranking of those is 2.71 stars, which would mean somewhat overvalued but within 10% of fair valuation.

Another shortcut is to check Morningstar’s fair market value for the nearest segments of the market that we can identify to the ETF’s coverage. I found three.

  • Large-cap stocks: 1.09
  • Wide-moat stocks: 1.05
  • Narrow-moat stocks: 1.10

The average suggests that SCHD is around 8% overvalued.

Finally, we can look at the yield metric. In the yield chart displayed earlier, my eyeball tells me that the average yield over the past 5 years has been about 2.9%. SCHD’s yield is 2.8% now, so that would suggest that the ETF is about 4% overvalued.

Overall, I put SCHD’s fair price at around $70. It is selling for about $75 now, so I see it as about 7% overvalued, which is within my usual fair-price range of +/- 10% of fair value. In dollars, I see the fair-price range for SCHD as $63 to $77.

SCHD is within that range now. It is certainly not selling at a discount, but it’s not dangerously overpriced either.

Summary and Conclusions

Among the dividend ETFs that I have examined, SCHD seems to come closest to accomplishing what dividend growth investors typically do, as highlighted by its 10-year streak of higher annual dividends. It comes closest to matching the way I pick stocks for my own portfolios.

SCHD’s Positives:

  • Picks stocks based on a combination of fundamental analysis and dividend characteristics.
  • Most of its stocks are high quality.
  • Its yield (2.8%) is high enough to pass many dividend growth investors’ minimum requirements.
  • Fast rate of annual dividend increases (12% per year for past five years).
  • 10 straight years of dividend increases. It has never cut its dividend.
  • Weighting and capping method insures a diversified portfolio among its 100 stocks.
  • Extremely low expense ratio (0.06%), so most of the dividends collected by the ETF actually flow through to the investor.
  • Once a stock is in the portfolio, the criteria for keeping it are relaxed. This keeps turnover (and the expenses associated with turnover) down.


  • 2.8% yield may be too low for some DG investors.
  • Low-yield, fast-growth stocks don’t get into the portfolio, because one of its fundamental screens favors stocks with higher yields. Thus, companies like Apple, Microsoft, Visa, Mastercard, and Lowe’s are not represented.
  • Large-cap-value tilt may not be what some investors are looking for.
  • Fund does not hold REITs.

This is not a recommendation to buy, hold, sell, trim, or add to SCHD. Any investment requires your own due diligence. Always be sure to match your stock and fund picks to your personal financial goals.

— Dave Van Knapp

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