Top Nav

An Entirely New Dividend Growth ETF

I’m intrigued by the recently launched Small-Cap Dividend Growth ETF offering from WisdomTree (NASDAQ:DGRS).

As a growth investor at heart, I love investing in companies that are expanding rapidly and capitalizing on new opportunities. When these companies are dividend growers – companies that regularly reward shareholders by increasing their dividends – the potential for outperformance is off the charts.

In fact 30 years of data show that dividend-growth stocks trounce other stocks. By far, small-cap dividend growth stocks are the best performers.

The following chart from Ned Davis Research shows what I mean – average annual returns for small-cap dividend growth stocks are around 20%. You can't beat that performance with large or mid-caps. As an added bonus, Ned Davis' research also shows that dividend growth stocks tend to be less volatile than their counterparts.

The DGRS is part of a slew of new specialty ETFs which suggest that investor appetite for dividend stocks is nowhere near satiated.

Just a few months ago, WisdomTree launched its Dividend Growth ETF (NASDAQ:DGRW) which encompasses companies across all market capitalizations.

And ProShares recently filed paperwork to launch a similar ETF which proposes to track the S&P 500 Dividend Aristocrats Index. This index seeks to include S&P 500 companies with at least a 25 year history of increasing dividends.

This flourishing corner of the market is feasting on demand for investments that beat the benchmark 10-year Treasury, which currently yields 2.7%.  So it’s only natural that ETF issuers are working tirelessly to package alternatives into specialty ETFs to capitalize on the opportunity.

Take the subject of my affection today, the WisdomTree Small-Cap Dividend Growth ETF (NASDAQ:DGRS), for example.

The fund takes WisdomTree’s own Dividend Growth ETF (NASDAQ:DGRW) and makes it better by cutting out the largest 300 companies, then taking only the smallest 25% of the companies that are left.

The result is a fund of 169 companies that resembles a dividend growth strategy on caffeine, and which capitalizes on three of the best performing stock attributes over the long-term; small companies, earnings growth and dividend growth.

Around 50% of the fund’s portfolio is allocated evenly to consumer discretionary and industrial stocks, while another 25% is split between technology and materials stocks.

Delving in to the fund’s top 10 holdings you’ll see that Questcor Pharmaceuticals (NASDAQ:QCOR) is the largest holding with a weight of 3.6% and which pays a dividend yield of 2.0%. Questcor only recently initiated its dividend, and has paid just four dividends in its short history. But clearly the fund manager sees potential here, supported by a recent 25% hike in the dividend.  

Publishing company Meredith Corporation (NYSE:MDP), which yields 3.4%, is also among the top ten holdings. This company has a long history of dividend growth dating back to the mid-1990s and is a perfect fit for the DGRS.

And The GEO Group (NYSE:GEO) is yet another compelling holding that most investors haven’t heard of. The company operates correctional and detention facilities for various governments. You and I might not like the fact that for-profit prisons exist, but growth and stability in the sector is too hard for income investors to ignore. The specialty-REIT offers a 5.6% yield, and the dividend more than doubled in 2013 to $0.50 a quarter.

No one stock is going to make or break this fund’s performance. So investors need to be on board with the broader strategy of small cap dividend growth, and to some degree not worry about the movements of any particular holding.

The attraction of an ETF like the DGRS is the one-stop-shopping efficiency that the fund’s strategy offers to investors. Concerning oneself with any single stock in many ways defeats the purpose.

This is an entirely new fund that has only been trading for a few days now, so don’t jump in with both feet. At the latest reading, DRGS has a net asset value of $2.5 million. Given the infancy for the fund and the unique strategy, I would expect that to grow in 2013.

I recommend monitoring DGRS’s daily performance for at least a week before buying, and then dollar cost average into the ETF to gradually achieve your desired position size. This will make you far more comfortable investing in this brand new fund than an “all in, all at once” strategy.

Editor’s Note: While I’m intrigued by this new dividend ETF, I am disappointed to see that one of my favorite dividend stocks isn’t a holding.  Growth investors who want to collect a juicy 8% dividend won’t want to miss out on this opportunity, even if you do buy shares of DGRS. I’m certain that you’ll want to take a look at my recently updated investment report, The Private Equity Firm Paying 8% Dividends.

This report gives you all of the details on this amazing publicly traded firm that paid out $70 million in dividends last year. With a dividend yield that is 3-times the yield of most dividend ETFs, this holding is one of my top recommendations for income investors. Click here to receive your copy of this report.