■ ETF · August 22, 2026
iShares Core Dividend Growth ETF's Two Strict Inclusion Tests Explained
DGRO only includes stocks with 5+ years of dividend growth and payout ratios below 75%, aiming for sustainable income growth.
Two Tests for Inclusion
The iShares Core Dividend Growth ETF (DGRO) tracks the Morningstar U.S. Dividend Growth Index, which applies two strict criteria for stock inclusion. First, a company must have increased its dividend for at least five consecutive years. Second, it must have a positive earnings forecast and a payout ratio below 75%. Additionally, the index excludes real estate investment trusts (REITs) and companies with dividend yields in the top 10% of the screened universe.
Why These Tests Matter
These criteria are designed to identify companies with a proven track record of dividend growth and the financial capacity to sustain it. A five-year history of increases demonstrates a durable business model and a commitment to returning capital to shareholders. The payout ratio limit ensures that companies retain enough earnings to fund future growth and maintain their dividend even during economic downturns. High payout ratios can signal vulnerability to dividend cuts, which would negatively impact both income and total returns.
For example, Microsoft, a top holding in DGRO, has increased its dividend for over two decades. In its 2026 fiscal year, Microsoft generated approximately $183 billion in cash from operations, easily covering its $26.4 billion in dividend payments, resulting in a payout ratio of just 14%. This leaves ample room for future increases.
Comparison with Yield-Focused Funds
Many popular dividend ETFs, such as SCHD and VYM, prioritize current income by screening for high dividend yields. DGRO, in contrast, focuses on dividend growth. While DGRO's yield has been less than 2% over the last 12 months, its dividend has the potential to grow over time, which can enhance total returns. Since its inception in 2014, DGRO has delivered an average annualized total return of 12.2%.
What It Means for Income Investors
For income investors, DGRO offers a strategy that emphasizes dividend sustainability and growth rather than immediate high yield. The fund's strict inclusion criteria aim to reduce the risk of dividend cuts and provide a growing income stream over the long term. This approach may appeal to those seeking to build inflation-adjusted income over time.
Reporting based on: Yahoo Finance. Figures verified against market data where available.