Key Points
- It's generally accepted that to achieve higher returns, you need to take on more risk.
It's generally accepted that to achieve higher returns, you need to take on more risk.
- However, this long-term strategy has delivered better returns with demonstrably less volatility.
However, this long-term strategy has delivered better returns with demonstrably less volatility.
- These three ETFs allow you to add this strategy to your portfolio.
These three ETFs allow you to add this strategy to your portfolio.
One of the generally accepted rules of investing is that to capture higher return potential, you need to take on more risk.
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Tech stocks, for example, usually come with more volatility, but they've delivered market-beating returns over the past few years. Consumer staples stocks, on the other hand, are more defensive but often lag the market.
Historically, one simple strategy has been able to reverse that relationship. It has actually delivered better returns with demonstrably less risk.
I have to warn you, though, that this strategy isn't exciting or flashy. But dividend growth stocks have been able to deliver for investors over the past 50 years.
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Dividend growers have produced better returns with less volatility
A recent study by Ned Davis Research examined S&P 500 stocks from 1973 to 2025. It found that companies that grew their dividends or initiated a new dividend returned 13% annually. That's roughly 13% higher than the 11.5% average annual return generated by non-dividend payers.
Dividend status proved to be very telling for other categories as well. Dividend payers who made no change to their distribution returned around 11.1% per year, while dividend cutters or eliminators gained just 9.5% annually.
The reason for the performance gap is pretty straightforward: balance sheet health. Companies that are increasing their dividends are generally in better shape because they're generating the cash flows that support this. Dividend cutters, on the other hand, are likely experiencing some form of financial distress, and it's showing up in their stock prices.
The interesting finding is that those returns haven't required taking on excess risk or any additional risk at all.
The study also found that dividend growers had a historical beta of 0.94 compared to a 1.11 beta for non-dividend payers, a 15% discount. The standard deviation of historical returns comes to a similar conclusion. In that case, dividend growers demonstrated 27% less volatility.
Three top dividend growth ETFs
If you want to capture the dividend growth strategy in your portfolio, here are the dividend ETFs best-suited for the job.
1. iShares Core Dividend Growth ETF
The iShares Core Dividend Growth ETF (NYSEMKT: DGRO) has one of the more lax dividend growth screens. Companies need to have at least five consecutive years of dividend growth and a payout ratio of less than 75%. This latter criterion helps ensure that dividend growth is sustainable.
2. Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) has a more stringent 10-year dividend growth requirement. It also eliminates the top 25% of highest-yielding eligible stocks, helping reduce the risk of yield traps damaging performance.
3. ProShares S&P 500 Dividend Aristocrats® ETF
The ProShares S&P 500 Dividend Aristocrats® ETF (NYSEMKT: NOBL) requires a 25-year dividend growth track record. This ETF tends to be the most defensive of the bunch due to the long-term durability and maturity of the companies it holds.
Dividend growth stocks won't outperform in every market environment. But there's clear evidence to suggest that as a long-term holding in a portfolio, it can add a very attractive risk/reward trade-off. Owning quality companies that have made a commitment to rewarding shareholders year after year is a strategy that has a place in virtually any portfolio.
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David Dierking has positions in Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends ProShares S&P 500 Dividend Aristocrats ETF and Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
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