Best Dividend Growth ETF For Your Money [WisdomTree Trust, National Health Investors Inc, Olin Corporation, Janus Capital Group Inc]

dividendsTyler Laundon: I’m always intrigued by new small-cap ETF offerings. These investment vehicles are a great way for investors that aren’t yet comfortable owning individual small-cap stocks to gain diverse exposure to this high-potential asset class.

And when a small-cap ETF is focused on dividend growers – companies that regularly reward shareholders by increasing their dividends – I’m even more compelled to dig deeper.

That’s because small-cap dividend growers have been shown to generate some of the highest returns in the stock market over the long term. That’s a lofty statement, but it’s true.

The following chart from Ned Davis Research shows exactly what I mean. Average annual returns for small-cap dividend growth stocks were around 20% from 1972 to 2012. That return is far better than the returns achieved by either mid-cap or large-cap dividend growers (the blue bars below show the dividend growth stock returns).

Ned Davis Research: Average Annual Stock Returns 1972 – 2012


So when WisdomTree launched its Small-Cap Dividend Growth ETF (NASDAQ:DGRS) last summer, I took a cursory look at the ETF. Given that it was a new ETF, with low trading volume and no trading history, I thought best to monitor the ETF for a few months before recommending investors buy it.

DGRS has now been trading for several months. Volume is still relatively light – around 6,300 shares trade daily – but the performance has been very strong. The fund’s current yield of 1.4% isn’t going to blow you away, but remember that the goal here is higher dividends down the road, not today – hence the dividend growth strategy.

And this fund delivers capital gains too, not just dividends. Since hitting the market at the end of July 2013, the DGRS is up by 13.1%. That’s better than the 9.8% rise posted by the S&P 500 over the same time frame.

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