The Best Dividend Growth ETF For Your Money

I’m always intrigued by new small-cap ETF offerings. These investment vehicles are a great way for investors that aren’t yet comfortable owning individual small-cap stocks to gain diverse exposure to this high-potential asset class.
And when a small-cap ETF is focused on dividend growers – companies that regularly reward shareholders by increasing their dividends – I’m even more compelled to dig deeper.
That’s because small-cap dividend growers have been shown to generate some of the highest returns in the stock market over the long term. That’s a lofty statement, but it’s true.
The following chart from Ned Davis Research shows exactly what I mean. Average annual returns for small-cap dividend growth stocks were around 20% from 1972 to 2012. That return is far better than the returns achieved by either mid-cap or large-cap dividend growers (the blue bars below show the dividend growth stock returns).

Ned Davis Research: Average Annual Stock Returns 1972 – 2012

So when WisdomTree launched its Small-Cap Dividend Growth ETF (NASDAQ:DGRS) last summer, I took a cursory look at the ETF. Given that it was a new ETF, with low trading volume and no trading history, I thought best to monitor the ETF for a few months before recommending investors buy it.
DGRS has now been trading for several months. Volume is still relatively light – around 6,300 shares trade daily – but the performance has been very strong. The fund’s current yield of 1.4% isn’t going to blow you away, but remember that the goal here is higher dividends down the road, not today – hence the dividend growth strategy.
And this fund delivers capital gains too, not just dividends. Since hitting the market at the end of July 2013, the DGRS is up by 13.1%. That’s better than the 9.8% rise posted by the S&P 500 over the same time frame.
And it’s also better than the 10.3% rise since July by WisdomTree’s other new ETF offering, the Dividend Growth ETF (NASDAQ:DGRW), which encompasses companies across all market capitalizations. Given that the DGRW focuses on larger companies, it may be worth considering if you’re not looking for the small-cap dividend growth exposure.
But if you are, then the small-cap-focused DGRS may be right up your alley. The fund has an interesting composition. WisdomTree basically took the DGRW and made it better (in my opinion) by cutting out the 300 largest companies. It then took only the smallest 25% of the companies that are left, and voila, you have the small-cap-focused dividend growth ETF.
Around 28% of the fund is allocated to industrial stocks, while 18% is invested in consumer cyclicals. Financials (13%), technology (12%) and basic materials (12%) round out the fund’s exposure, while healthcare, real estate and energy all have less than 6% allocations.
If you look under the cover, you’ll see that the fund’s top three holdings are National Health Investors (NYSE:NHI), Olin Corp. (NYSE:OLN) and Janus Capital (NYSE:JNS). These stocks yield 5.1%, 2.9% and 2.5%, respectively.
This fund is a compelling investment for dividend investors who are looking for both dividend growth and small-cap exposure. And with performance that has outpaced large-caps, mid-caps and the broad market over the past eight months, it offers significant capital gains potential too.

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