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ETF Specialist

A Distinctive Dividend-Growth ETF

This quality strategy looks beyond past dividend growth.

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 WisdomTree U.S. Quality Dividend Growth ETF (DGRW) is a solid strategy that emphasizes profitable companies with the potential for strong dividend growth. It tracks an index that targets 300 dividend-paying stocks with high returns on assets and high returns on equity during the past three years and strong expected earnings growth. This creates a portfolio of highly profitable names with durable competitive advantages, such as  Coca-Cola (KO),  Microsoft (MSFT), and  Apple (AAPL). The fund's holdings consistently generate higher average returns on invested capital than the constituents of the S&P 500. While the fund has a short record, its tilt toward highly profitable, dividend-paying companies should give it an edge over its peers in the long term.

This strategy attempts to select stocks that can offer high dividend growth in the future, regardless of whether they have done so in the past. Many of these names would not pass a demanding screen for past dividend growth, similar to those that  Vanguard Dividend Appreciation ETF (VIG) and  SPDR S&P Dividend ETF (SDY) employ. There are pros and cons to each approach. A record of dividend growth is evidence that a firm's managers are committed to a shareholder-friendly payout policy and is a sign of strong and stable profitability. But restricting stock selection to this criterion excludes many emerging dividend-paying firms and ignores forward-looking information about the sustainability of dividend growth.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.