ETF Choices for Dividend Growth

Secrets of Income Growth Success Part 9 ETFs

If you ask two different, experienced, and knowledgeable investors which funds are the best-of-the best, you will likely get two very different sets of suggestions. Much of the variation is the result of specific requirements each investor has and their personal biases or preferences towards certain metrics. First of all, one might lean towards mutual funds while the other prefers ETFs. Expense ratios may be of less importance to a more aggressive, but careful, investor, but lower expenses might appeal to another equally wise and careful investor. One investor may think dividends don’t really matter, or that low yields are just fine. Her counterpart might suggest that yield and dividend growth are of more interest. Some of this has to do with portfolio size as well.

For example, we don’t really need to have our portfolio double in value every 4-5 years. I’m content with a doubling of assets every 7-9 years. That first investor wants annualized results of 15-20% while I am more than satisfied with 8-10%.

How Many Different Investments Should I Hold?

Another point of discussion could be how many different mutual funds or ETFs should be in my portfolio. A good suggestion for beginning investors is probably no more than four or five. However, if you have a seven-figure portfolio, it might make sense to have many different types of funds and individual stocks. I think, as a rule of thumb, investors with less than $200,000 in their retirement accounts should stick to simple diversification with 4-5 funds. I prefer ETFs because I like the characteristics of ETFs. I won’t go into that now, as I have written about this in the past. However, I understand why some readers will think I overlooked good mutual funds that could be listed in this income-focused series.

The Choices are Still Daunting

According to Statista, there are now at least 2,600 ETFs available. There are sector ETFs, large-cap, small-cap, midcap, growth, and value ETFs. There are BDC and REIT ETFs. There are dividend yield ETFs and dividend growth ETFs and ETFs that don’t pay any dividends. There are 2x bull and bear ETFs, commodity ETFs, and bond ETFs. Where does one even begin?

You need to focus on a limited number of ETFs. There are many choices.

AAII Journal February 2022

Every year the AAII publishes various lists that slice and dice the different ETFs. Although I don’t spend a lot of time reading that issue, I generally look at it for ideas for future investments. The thing I like about their tables is that I can quickly see total returns, annual returns, yields, and expense ratios within a category like Large Value ETFs. So, on page 28 of the February AAII Journal, you can see some of the ETFs I have recommended in the past. They are DGRO, SCHD, DVY, and VYM. But as you can see, there are probably some other good choices like PKW, PRF, COWZ, and DLN.

Large Value ETFs AAII February 2022 Journal

They also published a list of the “Performance of the 50 Largest ETFs, as shown in the following image. With the possible exception of the bond ETFs like AGG and BND, just about any of them merits attention or consideration. Most of them have a decent expense ratio. Most of them pay dividends.

SOURCE: AAII Journal, February 2022 (I recommend you subscribe!)

Dividend Growth Leads to Income Growth

Because this series of posts is about the “secrets” of income growth success, I wanted to illustrate eight possibilities using Stock Rover’s charts for the following ETFs:  VYM, SCHD, DGRO, FDVV, SPHY, PFM, VIG, and IVOV. Look at each image and ask yourself if it deserves top billing in your portfolio. Your conclusions can be different from mine. Remember, I am picking ETF investments based on my requirements of decent, sustainable yield, and good historical dividend growth.

VYM is my largest ETF and my largest holding in total dollars.
SCHD is in our portfolio. I will be buying more shares in 2023.
DGRO is in our portfolio. I will be buying more shares in 2023.
I do not own shares of FDVV
This is a bond fund. I would not buy it or any other bond fund.
We do not own shares of PFM.
VIG is certainly another good choice for dividend growth.
IVOV is a good Mid-Cap Value ETF.

Comparing ETFs Side-by-Side

Although it is possible to compare ETFs on Fidelity’s web site, it is rather cumbersome to do so. I prefer the solution Seeking Alpha provides. The following two images illustrate how I might compare some decent dividend-paying ETF investments.

Comparing VYM, SCHD, DVY, HDV, DGRO, and SDY. Source: Seeking Alpha
I own ETFs in bold: SCHD, DVY, DGRO, VYM, HDV, SDY Source: Seeking Alpha

Remember, your returns might be better than what the charts or online data suggest. If you buy investments using dollar cost averaging, you can do better than the “data” suggests. The secret is to buy low and sell high. Because you don’t know when either will happen, buy shares gradually whenever you have dividend or earned income that can be used to buy additional shares.

Summary

When buying ETF investments, you should have a list of five or more things you consider. I suggest you consider dividend growth and dividend consistency as must-haves. I also like funds with billions in assets, and funds that have expense ratios less than 0.10%. I also like ETFs that don’t constantly have portfolio turnover. Funds that have 30% or more turnover in a year may be chasing performance. I’d prefer to follow a fund where the fund manager is confident of the portfolio he has created.

Don’t forget to look at the top ten investments in each ETF. You might find there is considerable overlap. So, for example, in the illustration from the AAII Journal, there is no reason to own shares of SPY, IVV, VTI, and VOO. They will have the same investments. However, don’t miss the fact that ETF IVW may be very similar to those four.

What Might You Do?

Look at your portfolio using Seeking Alpha. Think about creating your own rules for the ETFs you will add to your portfolio. Share your ideas with a trusted investor with more experience to see if they can identify any weaknesses in your portfolio. For example, I reviewed a portfolio that had three ETFs. They were all decent. However, they were all sector ETFs, and that probably isn’t the best course of action for a smaller portfolio.

A Reminder from King Solomon

Think about your ETF as a flock of sheep or a herd of cows. Is it a sickly herd or flock? Are the investments wandering into the wilderness and disappearing in the form of a poor return on your investment? Do you have a sufficient number of sheep for creating new lambs? Solomon knew the value of watching over his investment portfolio.

“Know well the condition of your flocks, and give attention to your herds, for riches do not last forever; and does a crown endure to all generations?” Proverbs 27:23-24 ESV