DGRW Is a Popular Dividend ETF for Passive Income. But Is It the Best?

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19 hours ago

The WisdomTree U.S. Quality Dividend Growth Fund focuses on high-quality companies that pay growing dividends.
The fund weights companies based on their dividend stream.
Its dividend yield isn't as high as other ETFs, and it has a higher expense ratio.
10 stocks we like better than WisdomTree U.S. Quality Dividend Growth Fund ›
The WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW) is one of several exchange-traded funds (ETFs) focused on dividend-paying stocks. That dividend emphasis has made it popular among investors seeking to generate passive income.
Here's a look at whether this fund is the best option if your primary objective is to produce passive income.
The WisdomTree U.S. Quality Dividend Growth Fund aims to track the returns of larger, high-quality U.S. companies with solid track records of growing their earnings and dividends. The fund tracks the WisdomTree U.S. Quality Dividend Growth Index, which screens for the top 300 dividend-paying companies based on a combination of growth and quality factors.
The ETF weights companies in the fund based on the cash they pay out in dividends each year relative to their market cap. That weighting puts a greater emphasis on the size of a company's dividend than its overall size. Here's a slide showcasing its top 10 holdings based on its last rebalance:
As that slide shows, tech titan Microsoft has the highest target weighting in the fund, at 8%. That's a lower percentage for Microsoft than if the fund used a market cap weighting. The fund weights by dividends to help put a greater emphasis on dividend payments. That's why oil giant ExxonMobil moved up to third place despite having a much lower market cap than semiconductor behemoth Nvidia.
By weighting stocks by dividend stream relative to market cap, the fund offers a higher dividend yield. It stood at 1.8% at its last rebalance, compared with 1.3% for the S&P 500. That's because it lowered its allocation to lower-yielding dividend stocks while increasing its exposure to companies offering a higher yield, like Exxon's 3.4%. In comparison, Microsoft's payout was recently 0.7%, while Nvidia's is 0.03%.
The WisdomTree U.S. Quality Dividend Growth Fund puts a greater emphasis on growth over dividend yield. That's not a bad strategy. Historically, dividend growth stocks have delivered higher total returns than companies that don't increase their dividends, to the tune of 10.2% annualized since 1973 for the former compared with 6.8% for the latter, according to data from Ned Davis Research and Hartford Funds.
However, given its lower yield, if your main focus is on generating passive income, the fund might not be the best option. Several dividend ETFs offer higher yields, including the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) and the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). VYM's last payment gave it an implied dividend yield of around 2.6%, while SCHD's was closer to 4%.
The Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index, which consists of companies with above-average dividend yields, excluding REITs. Currently, more than 585 companies have made that cut. It regularly removes companies that no longer pay dividends.
The Schwab U.S. Dividend Equity ETF is more selective. It tracks the Dow Jones U.S. Dividend 100 Index, which screens high-yielding dividend stocks for the 100 highest-quality companies based on their relative fundamental financial strength and dividend growth track record over the past five years. It reconstitutes its holdings annually, replacing lower-quality dividend stocks with the highest-quality payers.
In addition to paying higher yields, those ETFs have lower ETF expense ratios: 0.06% from VYM and SCHD, compared with 0.28% for DGRW. To put that into perspective, every $10,000 invested in DGRW would cost about $28 in annual fees, compared with $6 for VYM or SCHD. That higher cost eats into the dividend income that fund generates.
The WisdomTree U.S. Quality Dividend Growth Fund is a good fund for those seeking to add dividend stocks to their portfolio. Companies that pay growing dividends tend to deliver strong total returns over the long term.
However, the fund has some drawbacks if your main goal is to generate passive income. It has lower returns and a higher expense ratio than other dividend ETFs, so it's not the best dividend ETF to buy for passive income.
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Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Microsoft, Nvidia, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends WisdomTree and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
DGRW Is a Popular Dividend ETF for Passive Income. But Is It the Best? was originally published by The Motley Fool