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3 High-Quality Dividend Growth ETFs Beating the S&P 500
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Key Takeaways
Reduce AI concentration risk with high-quality dividend growth ETFs.
Focus on quality companies with consistent dividend growth and strong cash flows.
Gain broader sector diversification while maintaining competitive long-term returns.
Mega-cap tech giants have driven most of the market's gains over the past few years thanks to the AI boom. As a result, they now occupy an outsized share of most investors' portfolios, making many portfolios heavily dependent on the AI trade.
While that concentration is not entirely unreasonable, since these companies are driving the majority of S&P 500 earnings growth, it does increase portfolio volatility and the risk of a major drawdown when the AI trade comes under pressure.
The information technology and communication services sectors together account for almost half of the S&P 500 and are dominated by AI-related names.
I have long recommended that investors hold some dividend growth ETFs in their portfolios. Over long periods, dividends have accounted for the majority of the market's total return. In addition, dividend growth ETFs invest in high-quality companies with strong balance sheets and stable cash flows, allowing them to increase their dividends consistently.
These ETFs also tend to have meaningful exposure to other sectors because technology companies have historically not been major dividend payers. While legacy tech names like Microsoft ((MSFT - Free Report) ) and Apple ((AAPL - Free Report) ) have paid dividends for more than a decade, Meta ((META - Free Report) ) and Alphabet ((GOOG - Free Report) ) joined the dividend club in 2024.
The Schwab U.S. Dividend Equity ETF ((SCHD - Free Report) ) holds 100 stocks that have paid dividends for at least 10 consecutive years. It also emphasizes dividend quality and sustainability while charging just 0.06%.
Health Care, Consumer Staples, and Energy receive the largest allocations in the portfolio, helping investors diversify away from the mega-cap tech giants. SCHD has also significantly outperformed the S&P 500 Index this year.
The iShares Core Dividend Growth ETF ((DGRO - Free Report) ) invests in companies with a history of sustained dividend growth. It requires holdings to have at least five consecutive years of growing annual dividend payments and a payout ratio below 75%.
The SPDR S&P Dividend ETF ((SDY - Free Report) ) invests in companies that have increased their dividends for at least 20 consecutive years. The highest-yielding companies from that universe are then weighted by dividend yield in the portfolio.
To learn more, please watch the short video above.
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3 High-Quality Dividend Growth ETFs Beating the S&P 500
Key Takeaways
Mega-cap tech giants have driven most of the market's gains over the past few years thanks to the AI boom. As a result, they now occupy an outsized share of most investors' portfolios, making many portfolios heavily dependent on the AI trade.
While that concentration is not entirely unreasonable, since these companies are driving the majority of S&P 500 earnings growth, it does increase portfolio volatility and the risk of a major drawdown when the AI trade comes under pressure.
The information technology and communication services sectors together account for almost half of the S&P 500 and are dominated by AI-related names.
I have long recommended that investors hold some dividend growth ETFs in their portfolios. Over long periods, dividends have accounted for the majority of the market's total return. In addition, dividend growth ETFs invest in high-quality companies with strong balance sheets and stable cash flows, allowing them to increase their dividends consistently.
These ETFs also tend to have meaningful exposure to other sectors because technology companies have historically not been major dividend payers. While legacy tech names like Microsoft ((MSFT - Free Report) ) and Apple ((AAPL - Free Report) ) have paid dividends for more than a decade, Meta ((META - Free Report) ) and Alphabet ((GOOG - Free Report) ) joined the dividend club in 2024.
The Schwab U.S. Dividend Equity ETF ((SCHD - Free Report) ) holds 100 stocks that have paid dividends for at least 10 consecutive years. It also emphasizes dividend quality and sustainability while charging just 0.06%.
Health Care, Consumer Staples, and Energy receive the largest allocations in the portfolio, helping investors diversify away from the mega-cap tech giants. SCHD has also significantly outperformed the S&P 500 Index this year.
The iShares Core Dividend Growth ETF ((DGRO - Free Report) ) invests in companies with a history of sustained dividend growth. It requires holdings to have at least five consecutive years of growing annual dividend payments and a payout ratio below 75%.
The SPDR S&P Dividend ETF ((SDY - Free Report) ) invests in companies that have increased their dividends for at least 20 consecutive years. The highest-yielding companies from that universe are then weighted by dividend yield in the portfolio.
To learn more, please watch the short video above.