1 ETF I Wouldn’t Touch With a 10-Foot Pole

As a dividend investor, I don’t like the WisdomTree US Quality Dividend Growth Fund ETF. There is a better option that is worth considering.

Exchange-traded funds (ETFs) are products developed by Wall Street, in part, to extract management fees from its clients. This is an important dynamic to keep in mind because ETFs can sometimes be misleading, especially if you buy them based solely on their name.

This is the case with the WisdomTree US Quality Dividend Growth Fund Exchange Traded Fund (DGRW -0.04%). If you want an ETF full of quality dividend stocks, you’ll be better off with the Schwab US Dividend Stock ETF (SCHD 0.03%). Here’s why.

WisdomTree US Quality Dividend Growth Fund ETF Barely Cares About Dividends

The WisdomTree US Quality Dividend Growth Fund ETF begins its selection process by examining the WisdomTree US Dividend Index. It’s a fancy name, but it’s just a list of U.S. stocks that pay dividends. After that, the FNB looks at a combination of growth factors (based on long-term earnings growth expectations) and quality (three-year historical averages for return on equity and return on assets) to create a list of 300 stocks.

Image source: Getty Images.

In other words, the most important role that dividends play in constructing this WisdomTree ETF’s portfolio is that the companies included must pay one. That’s the dividend bar that stocks must meet, and it’s low. Based on that, it seems like a stretch to lump the words “dividend” and “growth” together in the name.

The yield, by the way, is 1.6%, which is only slightly higher than the average of 1.3% S&P 500 stocks. This is not surprising, given the ETF’s lack of emphasis on dividends. And for that tiny yield, you pay a pretty hefty 0.28%. expense ratio.

Schwab US Dividend Equity ETF Outperforms in Growth and Yield

By comparison, dividend growth is the foundation of the Schwab US Dividend Equity ETF. It only looks at companies that have increased their dividends every year for at least a decade (excluding real estate investment trusts). Then a composite score is created that looks at cash flow versus total debt, return on equitydividend yield and the five-year dividend growth rate. Note that dividend growth remains a key factor, as does yield, even after the original stock universe is created. But the really interesting inclusions are the measures that examine financial strength (cash flow to total debt) and company quality (return on equity).

The Schwab US Dividend Equity ETF tries to balance company quality with dividend yield, with dividend growth thrown in. And it does a pretty good job of doing that, with a dividend yield of 3.6%. At the same time, shareholders pay a meager expense ratio of 0.06%. If you’re looking for “quality dividend growth” stocks, the Schwab US Dividend Equity ETF’s approach will likely get you much closer to the mark than the WisdomTree US Quality Dividend Growth Fund ETF.

DGRW data by Y cards.

Does this mean the WisdomTree US Quality Dividend Growth Fund ETF is a bad ETF? No, not at all. It has outperformed the Schwab US Dividend Equity ETF since about the beginning of 2023. But it does highlight a key point. The WisdomTree US Quality Dividend Growth Fund ETF is a growth An ETF that selects only dividend-paying stocks, with technology-related sectors making up nearly a third of the portfolio. The Schwab US Dividend Equity ETF strives to find high-quality stocks with attractive yields, with technology making up just under 9% of its portfolio.

The technology sector, and particularly some chipmakers, has outperformed its peers significantly in recent times. But technology is not a particularly profitable sector most of the time. Sure, dividends may be “high quality,” but yields are mediocre.

Overall, if you’re looking for dividend stocks, the WisdomTree ETF will likely leave you a little flat compared to the Schwab ETF, where dividends and dividend growth both play a larger role in the selection process.

Don’t trust the name of an ETF

The name of the WisdomTree US Quality Dividend Growth Fund exchange-traded fund may lead you to believe that this fund does something it doesn’t actually do. But you have to dig into the methodology to understand that the name is a bit misleading. I’ve done that work, and now that I understand what the fund does, I wouldn’t touch it. My investment goals are different.

The Schwab US Dividend Equity ETF will likely get you closer to the mark if you’re looking for quality dividend growth stocks.

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