Looking for the best dividend growth ETF? Here are some tips on how to find it—and how to fit it into your portfolio

We’ve always placed a high value on a record of dividends, mainly because it provides something of a pedigree for investments we recommend. After all, you can’t fake a record of dividends. It takes a lot of success and high-quality management for a company to have the cash and the determination to declare and pay a dividend every year for five or 10 years. It’s not something you can create at the spur of the moment.

Here’s a look at how to spot the best dividend growth ETF for your portfolio.

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Include the best dividend growth ETF investing into your portfolio strategy and you’ll expand your odds of investment success

Growth dividend stocks are a unique type of investment that can deliver strong earnings quarter after quarter—and yet at the same time pay dividends. Growth stocks can hold the potential for greater gains than conservative selections. However, they typically can also expose you to a higher level of risk—whether or not they are dividend-paying stocks.

Nonetheless, we feel that dividend growth stock investing can be a part of your portfolio if your stock picks (or ETFs that hold those picks) have strong business models, balance sheets and so on.

Look beyond yield to find the best dividend growth ETF

As with conservative dividend-paying stocks, the best dividend growth ETF offers investors an added measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, at the same time, it’s important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). That’s because an usually high yield can be a danger sign—for example, it may foreshadow a dividend cut.

That’s why we look beyond dividend yield when making investment recommendations, and look for dividend stocks that have an established business and at least some history of building revenue and cash flow.

Here are the characteristics of the best dividend ETFs

• Look for ETFs that hold companies with long-term success and a long history of paying dividends. These companies are the most likely to keep paying and increasing their dividends.
• Review the current financial health of each company in the ETF. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.
• How does the company manage its relationships with investors in terms of wanting to keep rewarding them? If there is a favourable relationship, and the company fits the other qualifications listed above, it may be a good dividend-paying stock to invest in.
• Note the competition. Look for ETFs with companies with a strong hold on a growing market and a unique product or service that cuts its competition.

Look for the best dividend growth ETF to bring the best of both worlds to your portfolio 

Investors get the broad market exposure of a traditional mutual fund, plus the ability to trade at will with nominal fees. The best ETFs represent a low-cost, tax-efficient way for investors to make money in the long term.

Investors can buy ETFs via stock exchanges on margin or sell them short. The best ETFs offer well diversified, tax-efficient portfolios with exceptionally low management fees. Investors large and small use ETFs to build well-diversified portfolios.

ETFs have evolved, and competition has increased. Still, you need to be very selective with your ETF holdings.

Find the best dividend growth ETF by looking for an ETF that practices “passive” management

The best high dividend growth ETFs practice “passive” fund management, in contrast to the “active” management that conventional mutual funds or some new ETFs provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investments down.

We think you should stick with “traditional” ETFs. 

Use our three-part Successful Investor approach to guide all of your investing decisions

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight. 

Some investors believe they can make more money with actively-managed ETFs over passively-managed ETFs. What has your experience with these investments been? 

Do you look for dividend growth ETFs or do you prefer to stick with individual dividend stocks in your portfolio?