Retiring (Early) With Dividend Growth: Why DGRW Is A Terrific ETF

Introduction

While reasons differ, I think it's safe to say that most people on Seeking Alpha invest for their retirement. Whether it's to have a little extra once they retire at 65 or to retire much earlier, it's all based on finding the right strategy that comes with a good risk/reward.

Taking huge risks and hoping for early retirement, with the possibility of losing everything, is not a sound strategy.

It also needs to be said that it will be increasingly difficult to prepare for retirement. My generation, the late Millennials, for example, are dealing with low housing affordability and other issues that make it hard to get a good head start.

Earlier this year, the Wall Street Journal wrote an article that I have used in a couple of my own Seeking Alpha articles. It had the mildly depressing title When Will I Retire? How About Never.

Besides highlighting people who choose to work beyond the typical retirement age, the article revealed a shift in expected versus real retirement age.

For example, 29% of workers now expect to retire after turning 70 or not at all. Just 5% of people expect to retire before turning 55. That is well below the 13% of retirees who actually retired before the age of 55.

Moreover, since the Great Financial Crisis, we've seen a steep increase in the labor force participation of the elderly.

These numbers make sense, as this is what Bloomberg wrote in April (emphasis added):

Nearly one in five people aged 59 and older said they didn't have a retirement account and 27% of respondents said they haven't set anything aside for their later years. That compared to a quarter of Gen X respondents.

For those aging Americans who do have retirement accounts, persistent inflation has thwarted their plans, worsening the $7 trillion retirement-savings shortfall. Among baby boomers who are employed and saving for retirement, 17% said they've decreased their contributions to their retirement accounts as a result of inflation. Another 5% of respondents aged 59 and older said they can't afford to contribute to their retirement account at all.

These numbers are dire, and I doubt they are much better in other nations.

This brings me to the star of this article, which is the WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ:DGRW). In this article, I'll explain why this ETF is a great tool to build wealth, thanks to a strong underlying strategy, a fantastic portfolio, and a favorable risk/reward profile.

So, let's get to it!

Dividend Growth Is The Way To Go

Almost every single one of my investments is a dividend growth investment with a focus on growth, compared to buying high-income.

I am not currently in need of a high income from my investments. However, I strongly believe that historical evidence has shown that investing in companies with growing dividends is the best way to build wealth and eventually generate income.

According to Nuveen (emphasis & charts added):

Dividend growth stocks have provided an attractive combination of earnings and cash flow growth potential, healthy balance sheets, and sustainable dividend policies. These stocks have historically offered compelling performance during up markets and provided a buffer during market drawdowns and in volatile environments.

Over the long term, dividend growers and initiators have generated higher returns with less risk, measured by standard deviation, than companies that maintained their dividends, paid no dividends, and reduced or eliminated their dividends (Figure 1).

Additionally, while dividends are not guaranteed and will fluctuate, they have contributed significantly to equity total return over the decades. In fact, from 1930 to 2022, 41% of the annualized total return of the S&P 500® was derived from the payment and reinvestment of dividends, with capital appreciation contributing the rest (Figure 2).

In other words, the best way to achieve outperforming returns and lower volatility is by buying dividend growth stocks. That's fascinating, as some (most?) people believe that the higher the risk, the higher the return. That's not the case, at least not on a long-term basis!

Also, on a long-term basis, we need to expect that a big part of our total return will consist of dividends, especially in times of subdued capital gains.

Depending on the economic environment, these periods may be decades.

What Makes DGRW So Special

Usually, whenever I need a benchmark/proxy for dividend growth stocks, I use the Vanguard Dividend Appreciation ETF (VIG). As much as I like that ETF, I think I may have found a better one.

The DGRW ETF is an ETF that:

[...] seeks to track the investment results of dividend-paying large-cap companies with growth characteristics in the U.S. equity market.

Before we dive into the ETF's numbers, let's look at its performance, which is exactly what one should expect based on what we just discussed. Although we can backtest only going back to 2014, we see that DGRW has returned 11.1% per year, outperforming the S&P 500 by a slight margin. Moreover, it has done it with a lower standard deviation (higher return, lower risk).

Again, if DGRW had been established ten years earlier, I believe the outperformance would have been even bigger.

Not only are decades worth of empirical research (like the one from Nuveen) on our side, but it also helps that DGRW is a top-rated ETF.

It has a full five-star rating from Morningstar.

It also has a top-rated scorecard from Seeking Alpha's quants, which shows top scores for momentum, dividends, risk, and liquidity.

With that said, DGRW was incepted on May 22, 2013. The ETF has an expense ratio of 0.28%, which is the biggest issue I have with this ETF. After all, most index funds cost just 0.01% to 0.05%. However, please note that these expenses have been incorporated into the total return I just showed you. Despite these higher fees, the ETF was able to outperform.

This expense ratio also didn't keep the ETF from becoming extremely popular. It now has close to $10 billion in assets under management. That number used to be less than $3 billion less than four years ago.

Having said that, this ETF holds some of my favorite investments. It's also highly diversified.

The ETF, which tracks the performance of the WisdomTree U.S. Quality Dividend Growth Index, has a portfolio consisting of 298 stocks. All of these are located in the United States.

• 96% of its holdings have a market cap of more than $10 billion.
• Its top-10 holdings have a weighting of 36%.

As one can expect, the ETF is overweight information technology stocks. That's where growth has been in recent years. However, it also has significant exposure in consumer staples, industrials, and health care, which are some of my favorite places to invest.

Energy, which I also love (I have 20% exposure), accounts for just 0.6% of the ETF. However, that makes sense, as energy comes with high yields and special dividends. That's not what dividend growth ETFs are looking for.

Looking at the top 10, we see that the ETF is led by Microsoft (MSFT) and Apple (AAPL). I'm not surprised by that, as both stocks offer technology exposure with strong long-term dividend growth. Buying tech leaders that come with solid dividend growth is not easy.

Other top 10 holdings include healthcare giants like Johnson & Johnson (JNJ), consumer cyclicals like Home Depot (HD), and consumer staples like Coca-Cola (KO).

If I weren't allowed (for some reason) or able to hold single stocks, I would very much like to own this ETF.

With all of this said, the ETF currently yields 1.9%, which is 40 basis points above the S&P 500's yield.

As we can see in the Seeking Alpha overview below, the ETF has hiked its dividend by 7.4% per year over the past three years. Over the past five years, that number was 7.2%.

This dividend growth consistency is important, as a lot of growth-focused ETFs tend to change major holdings so often that investors somewhat lose the dividend growth benefit.

This isn't the case here.

I believe that DGRW is a terrific ETF for investors looking to buy dividend growth without having to take the risks of buying single stocks.

The stock has a strong performance with a favorable risk/reward. It has fantastic holdings and consistent dividend growth.

The only thing that bothers me is the 0.28% expense ratio. While this did not keep the fund from outperforming, I hope that this ratio will be lowered as the fund gets more popular.

Other than that, I think it's indeed a five-star top-tier dividend growth ETF that can help many achieve their retirement goals.

Takeaway

In a world where retirement seems like a distant dream for many, it's crucial to adopt a smart investment strategy.

Seeking early retirement with high-risk ventures is not the way to go. The reality is that preparing for retirement is getting harder, especially for my generation, the late Millennials, grappling with low housing affordability and other financial challenges.

More people now expect to work well into their 70s, while only a handful anticipate retiring before 55. This trend is due to economic uncertainties and the persistent threat of inflation, which has derailed retirement plans for many.

So, how can we build wealth and secure our retirement?

The WisdomTree U.S. Quality Dividend Growth Fund emerges as a stellar option. DGRW focuses on dividend growth stocks, historically proven to deliver superior returns with lower risk. The fund's performance, Morningstar/Seeking Alpha rating, and diversified portfolio make it an attractive choice. The 0.28% expense ratio is a drawback, but this hasn't hindered its growth.

With a solid performance, low risk, fantastic holdings, and consistent dividend growth, DGRW stands out as a top-tier dividend growth ETF. My only hope is that its expense ratio may decrease with time, making it an even more appealing option to help us reach our retirement goals.

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