Look, I get it: many folks love ETFs, mainly because of the cheap management fees.
I mean who doesnt love a deal? And it is true that ETFs fees are a fraction of those levied by the typical mutual fund or closed-end fund (CEF).
Trouble is, most ETF buyers get exactly what they pay for! Some of the worst performers in ETF-land are dividend-growth ETFs, which sound like a nice 1-click way to load up your portfolio with soaring payouts.
Too bad they cant stop tripping over their own feet!
Look at how three major dividend-growth ETFs, the iShares Core Dividend Growth ETF (DGRO), Vanguard Dividend Appreciation ETF (VIG) and ProShares S&P 500 Dividend Aristocrats ETF (NOBL), have fared in the past year:
Stocks Lap Dividend-Growth ETFs
As you can see, the S&P 500 (in orange) blew past this trio, with a 24% total return.
The best our dividend-growth ETFs could do was the 12% posted by VIG, in blue abovejust half the markets gain! Particularly disappointing is NOBL, which holds the 67 S&P 500 Dividend Aristocrats, well-established stocks that have hiked payouts for 25 years or more.
No matter. NOBL staggered across the line with a sorry 5.6% gain. And its not like youre getting big dividends for your trouble: VIG yields 1.9%, while DGRO pays 2.4%. NOBL is also a pauper, with its 2.1% payout.
Dividend-Growth ETFs Should Have a Built-In Advantage
This is particularly shocking when you consider that all these ETFs have an edge that should make them a shoo-in to top the market, and its right in their names: dividend growth. Thats because a rising payout is the No. 1 driver of price gains.
That might sound surprising, as most folks see dividends and share prices as different animals. But it comes down to the stair-step pattern of a rising payout, which pulls the share price higher at every turn.
Consider Texas Instruments (TXN), which drops big payout hikes on the regular.
We held TXN in my Hidden Yields dividend-growth advisory up until January 2022. In that time, the payout popped 130%, pacing the share price to a 138% rise. The pattern is unmistakable:
TXNs Dividend Magnet Powers Its Share Price
That, by the way, crushed our dividend-growth ETFs. It wasnt even close!
Which Demolishes Dividend-Growth ETFs
Its a textbook example of why we look to individual stocks for strong returns. But this doesnt mean our three ETFs are worthlesswe can use them as a kind of dividend roadmap, sifting through their holdings to pluck out the fastest-growing payouts.
Lets do that, drawing one ticker from each of these three ETFs. Ive also ranked them from third to first, so you can easily see where the best value is:
Dividend-Growth Pick No. 3: Automatic Data Processing (ADP)
Our bronze-medal pick, ADP, is the No. 10 holding of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). Its a near-double Dividend Aristocrat, having hiked its payout for 49 years. As with Texas Instruments, this payroll manager has a share price that tracks its dividend higher, puppy doglike:
ADP Cuts the Dividend Paychecks, Investors Buy More
The firm has come a long way from its founding in 1957, when it managed punch-card machines to track employee hours and printed the resulting paychecks. These days, its payroll software manages deductions automatically, including adjusting for tax changes.
It goes well beyond that, too, managing everything from recruitment and onboarding to benefits and retirementessentially anything a business needs when it comes to dealing with employee compensation.
The beauty of this business model is that once a firm is in ADPs ecosystem, its tough to leavehence the companys 92% retention rate. Whats more, the payroll-management market is fragmented, with ADP holding the biggest share at around 10%. That leaves it a lot of room to grow by acquisition.
Meantime, ADP is seeing strong revenue growth through retention, new business and higher interest rates on the payroll funds it holds for clients (which it invests in conservative assets, similar to an insurance company). Management is calling for 10% to 12% EPS growth in fiscal 2024. That, plus ADPs 56% payout ratio, will keep the dividend popping.
So why is ADP our No. 3 pick? If we see a recession later this year, it would weigh on the share price, and Im not sure thats fully priced in, given ADPs P/E of 28, just a touch below its five-year average of 31.
Dividend-Growth Pick No. 2: Chevron (CVX)
CVX, the No. 8 holding of the iShares Core Dividend Growth ETF (DGRO), is worth our attention because, as mentioned, oil stocks missed the party last year.
But thats unlikely to last, for three reasons: continued strong consumer spending as inflation moderates; ongoing Mideast crises; and, as discussed last week, the need to refill the US Strategic Petroleum Reserve (SPR)the nations emergency stash of oilafter the Biden Administration drew down nearly half of it to combat rising fuel prices.
Uncle Sam will drive up the goos price, though thats unlikely to happen in an election year. Put this one down as a long-term catalyst.
Moreover, CVXs Dividend Magnet points to a bounce. As you can see below, the stock price bounces back above the dividends growth every time it falls off track, and we have another gap open now:
CVXs Dividend Gap Points to Future Gains
Even if that bounce takes a while to materialize, CVX should get downside protection from its bargain forward P/E of 10.7. Moreover, the dividend only accounts for 44% of the last 12 months of earnings, so its safe.
Meantime, CVX continues to build on its position as the biggest player in US shale, including the biggest shale play of them all: the Permian Basin in Texas. CVX recently acquired PDC Energy, adding assets in the Permian and Colorados DJ Basin.
The only reason why CVX doesnt take the crown? Its dividend growthand by extension its Dividend Magnetare a shadow of those of our gold medal pick.
Dividend-Growth Pick No. 1: Visa (V)
The demise of the (physical) greenback (thanks, COVID!) has been a boon to Visa, the No. 6 holding of the Vanguard Dividend Appreciation ETF (VIG).
The decline of paper money has sent more transactions flowing down Visas payment network. And the firm, which processes 60% of US credit-card transactions, takes a slice of each one.
Those all add up: Visa posted $33 billion of revenue in fiscal 2023, up 43% from 2019. And with US consumers still holding up as inflation (and soon interest rates) ebb, we can expect that to continue.
Meantime, Visa isnt a bankit just processes payments. That subtle, but critical, detail is the reason for the firms ironclad balance sheet, with $20 billion in long-term debt cancelled out by $20 billion in cash. Thats as spotless as it gets!
No wonder Visa is a cash cow, with free cash flow per share up 237% in a decade.
Millions of Swipes Add Up to a Cash-Flow Wave
Thats boosted the payout 420% (ignore Visas 0.8% yielddividend growth is where the partys at). And as with Chevron, Visas stock has run ahead of its payoutuntil now:
Visas Dividend Gap Is a Buying Opportunity
That tells us that Visa is undervaluedand that cant last as the firm grows revenue, thanks to the resilient economy. The topper: Its extending its domination of plastic transactions to the growing number of virtual transfers, too.
5 Explosive Dividend Magnet Picks Set to Drop HUGE Payout Hikes in 24
Dividend-growth ETFs are a perfect example of the outdated thinking we simply cant afford in todays marketwhich is unlike any weve lived through before.
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Ive got 5 such stocks waiting for you now. Each one, like Visa, Chevron and ADP above, boasts a soaring dividend payout thats yanking its share prices higher. Its a recipe for solid gains, and reliable, growing income, in ANY market.