Is DGRO the perfect ETF?

What if I told you that there was one ETF that would provide with a growing and consistent stream of dividends, decent capital growth, alongside protection in down markets? Well, I think that I have found one such ETF. It is called the iShares Core Dividend Growth ETF, or DGRO. It is very different from the more well known SCHD, which tracks the highest yielders in the market. As most of us know, high yields are often unsustainable, because the payout ratio is too high; or the share price has just come down so that the trailing yield looks really good, but the business is in trouble. I learnt this lesson recently with Spark, the yield was high and the PE ratio was low for a reason. The business is just not very good.

DGRO tracks the Morningstar Dividend Growth Index. The stocks in this index must have raised their dividend for 5 consecutive years, and their payout ratio has to be below 75%. REITs (Real Estate Investment Trusts) are obviously ruled out because they have to have payout ratios above 90%. Making sure that companies within the index have payout ratios below 75%, means that the businesses are reinvesting in growing their businesses, and not sacrificing their growth to keep their dividend yields high.

The total returns for the ETF are very attractive; over the last 10 years it has done 13.6% annually, 10.96% over the last 5, and 12.95% over the last year. The main holdings are companies that we all know; Microsoft, Exxon Mobil, Apple, J & J, Broadcom, and Coca Cola. These are sound companies, with solid track records of both share price and dividend growth. The expense rate of the ETF is 0.8%, which is a little bit higher than the SPY ETF, but the beauty of DGRO is that it provides you with both growth and income. The trailing yield is 1.98%, which is not high, but is very sustainable, and will grow as the share price grows. In total it has 391 holdings and a beta of 0.67, which means that it is 33% less volatile than the broader market.

So, will I sell everything I have and buy this one ETF? The problem with this thinking is also the problem with owning the ETF itself. Selling everything implies me taking action and fiddling. Charlie Munger, the 2IC at Berkshire, used to say that money is not made in the buying and selling, but in the waiting. If anyone were to own DGRO, the profit will be made by doing nothing. A great thing with owning an ETF like this, like owning an S & P 500 ETF, is that once stocks don't make the grade for inclusion in the index, they are immediately excluded. This doesn't require you to do anything; the ETF does it for you. Once stocks stop their dividend streak, they lose their spot in the index. Going back to Spark, this would have been a good time for me to have sold the stock. A couple of years ago, they decreased their dividend for the first time in about 10 years. I could have saved myself a lot of money if I had sold them when they did this. But at the time I let my emotions get in the way and held them, because I was being 'loyal' to Spark. Bad decision!

Owning the DGRO ETF would mean that I would not be prone to making bad decisions, like not selling when I should have. The ETF would have immediately got rid of a stock like Spark the moment that it cut its dividend. The rules for inclusion in the index, are actually rules that I have been trying to follow for years when selecting stocks. In fact, the holdings in my American account (except Berkshire which doesn't pay a dividend and TSM which is based in Taiwan), are all holdings in the ETF; Visa, Microsoft and Eli Lily. Many of the main holdings in the Berkshire Hathaway portfolio, are also holdings in the ETF; Visa, Exxon Mobil and Apple.

There is no question that this ETF would be a solid lifelong holding. Maybe it would be an idea to devote my American account to the DGRO ETF, especially since I already try to follow the rules of the ETF, and many holdings of mine are also in the ETF. If I ever feel that I do own too many stocks to keep track of, it would be a sound decision to own DGRO for the next 30 years.