Some Dividend Growth ETFs Are Beating the Broad Market -- Is It Sustainable?

Dividend growth exchange-traded funds (ETFs) are having their day in the sun, often outperforming the broad market. For example, the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) has delivered a one-year total return of 28.7% (through Sept. 10, 2026), compared with the S&P 500's return of roughly 18.6% over the same period.

While some dividend growth ETFs are making waves, it's worth taking a closer look. For a more nuanced picture, this article will touch on the historically cyclical nature of dividend growth funds. You can't predict the future, but you can learn to recognize patterns from the past.

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No investment comes with a 100% guarantee

As attractive as SCHD, iShares Core Dividend Growth ETF (NYSEMKT: DGRO), and other dividend growth ETFs are, no investment is guaranteed. Weighing the pros and cons can help you determine if a growth fund is right for you.

Pros of dividend growth ETFs

• In general, ETFs can provide portfolio diversification.
• Dividend growth ETFs generate a regular revenue stream.
• Regular payouts may continue, even when company earnings are down.

Cons of dividend growth ETFs

• There's no guarantee of future dividends.
• When stock values decline, that decline could offset the yield.
• Investors are taxed on distributed dividends.

Why some dividend growth ETFs are on a winning streak

Investors can thank the current financial environment for dividend growth. Rising interest rates put pressure on long-duration growth stocks while favoring cash-generative, shareholder-friendly companies. And historically, dividend strategies have held up better during recessions and periods of rising rates. However, because the market is ever-changing, the types of investments people are interested in change with it.

Is outperformance here to stay?

You can reasonably count on a few things. For example, you can count on bond prices and interest rates to move in opposite directions. You can expect earnings growth to drive long-term returns. You can expect high interest rates to push the market toward cash-generating investments. Finally, you can expect shifting market conditions to change investor behavior.

Rather than assuming dividend growth ETFs will always outperform the broader market, it's more realistic to view the dividend growth trade as a durable defense against market shakeups. It's an investment that makes sense when your goal is to move away from more speculative investments toward individual stocks and ETFs that pay dividends you can reinvest.

While dividend growth ETFs are unlikely to sustain the same pace indefinitely -- primarily because market performance inevitably changes -- they remain a core investment in a diversified portfolio. There's much to like about an investment that provides access to top-performing companies across multiple sectors while also rewarding investors with a steady stream of income to reinvest and the potential for capital appreciation.

Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.