Dissecting Dividend Growth ETFs

Dividend growth ETFs have become increasingly popular among equity income investors.

These ETFs seek to capture companies that have a history of increasing their annual dividend payments over time.

This return of profits strategy typically represents a company with a sound capital structure, that is focused on returning value to its shareholders. By investing in these stocks, investors are able to raise the probability that future dividend increases will keep pace with inflation as well.

The most prominent ETF of the dividend growth classification is the Vanguard Dividend Appreciation ETF (NYSE:VIG). This fund tracks the NASDAQ US Dividend Achievers Select Index and has over $19 billion invested in 163 dividend-paying stocks. Top holdings include Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO).

Based on the most recent distribution, VIG has a current 30-day SEC yield of 2.02 percent. However, based on historical distribution patterns, the income from VIG tends to rise and fall on a quarterly basis according to the underlying stock dividends. Since this ETF debuted in 2006, the annual income has been steadily increasing.

Another ETF seeking to make its mark in the dividend growth arena is the WisdomTree U.S. Dividend Growth Fund (NASDAQ:DGRW). This fund tracks 300 companies within the WidsomTree Dividend Index with the best growth and quality factors.

The growth ranking is based on future earnings expectations, while the quality factor is attributed to return on equity and assets. The ETF's top holdings include Exxon Mobil (NYSE:XOM) and Apple(NASDAQ:AAPL).

The major point of differentiation between these two ETFs is that VIG uses a backward-looking growth screen to pinpoint a history of dividend increases, while DGRW attempts to identify forward-looking fundamental trends.

The end result is a marked difference between individual company and sector allocations. VIG is primarily weighted towards industrial and consumer goods, while DGRW has its largest weighting in information technology.

Its also worth noting that WisdomTree recently released a developed-Europe version of this dividend strategy with the WisdomTree Europe Dividend Growth Fund (NYSE:EUDG).

Income investors may benefit from using multiple ETF strategies to capture a wide swath of dividend growth companies and enhance diversification.