Why DGRO Beats HDV for Any Retiree Who Won't Touch the Money for 10 Years

When it comes to selecting between two dividend exchange-traded funds (ETFs) that share the same expense ratio, the decision can appear straightforward. However, the ETF that generates lower quarterly income may ultimately result in significantly greater wealth over a ten-year period.

Major asset management firms like Vanguard, iShares, Charles Schwab, and State Street provide various dividend ETFs tailored to different types of income investors. Among the offerings from BlackRock's iShares are two notable options: the iShares Core Dividend Growth ETF (DGRO) and the iShares Core High Dividend ETF (HDV). Both funds come with a competitive expense ratio of 0.08% and are generally tax efficient, as they do not include real estate investment trusts (REITs) in their portfolios. However, the similarities between the two end there.

For retirees, the choice of a dividend ETF often hinges on the headline yield, with many opting for the fund that offers the higher rate. This approach makes sense as retirees seek to generate enough income to cover their expenses without selling shares and depleting their principal. Nevertheless, it is crucial to recognize that principal and income should not be viewed as entirely separate categories. The total return on an investment ultimately dictates the amount of wealth available for spending. For retirees who plan to leave this portion of their portfolio untouched for the next 15 years, comparing DGRO and HDV underscores the importance of prioritizing compounding growth over a higher initial yield.

Currently, HDV provides a clear edge in terms of income generation. Its 30-day SEC yield stands at 3.34%, significantly higher than DGRO's yield of 1.95%. If these yields remain consistent, a $1 million investment in HDV would yield approximately $13,900 more annually than DGRO, translating to an extra $3,475 per quarter. This difference can be substantial for retirees who depend on these distributions for their expenses, allowing them to withdraw more cash without needing to sell shares.

However, if retirees are not planning to access these funds for another decade, the immediate income comparison becomes less critical. During the accumulation phase, the rate at which the entire investment grows—including both dividends and capital appreciation—is what truly matters. Historically, DGRO has significantly outperformed HDV in this regard.

Over the past decade, with dividends reinvested and prior to taxes, DGRO has compounded at an impressive annual rate of 13.38%, while HDV has returned an annualized rate of 9.11%. While a 4.27% difference may not seem substantial on a yearly basis, compounding amplifies this gap over time. For example, a hypothetical investment of $1 million over ten years at these historical rates would result in a wealth disparity of approximately $1.12 million.

While these figures represent past performance and cannot predict future results, they highlight the opportunity cost of viewing dividends and capital gains as separate entities. If DGRO offers lower dividend income but ultimately leads to greater wealth accumulation, retirees can later generate additional income by selling shares. For taxable investors, long-term capital gains may also benefit from favorable federal tax treatment, although individual circumstances will vary based on income, holding periods, and cost basis.

Psychologically, selling shares may feel different from utilizing dividends for income, but from an economic standpoint, it is preferable to hold a portfolio that provides a superior risk-adjusted total return and to sell a small number of shares as needed, rather than sacrificing long-term compounding to avoid touching the principal.

That said, there is nothing inherently wrong with HDV. Retirees who prefer to live off distributions may find HDV's 3.34% yield appealing. Additionally, for those who cannot forego the higher yield, a 50/50 allocation between DGRO and HDV could be a sensible strategy, increasing current income while still maintaining significant exposure to both funds.

It is essential to keep in mind the historical cost of such a compromise; each dollar shifted from DGRO to HDV over the past decade has resulted in lower total returns. For funds that are not expected to be touched for another ten years, prioritizing stronger compounding potential and addressing income needs at the appropriate time seems to be the wiser choice.