This High-Yield ETF Has Increased Payouts 11 Years Straight, and It's Still Undervalued

Consistent dividend growth is a goal for many income investors. Exchange-traded funds (ETFs) aren't necessarily as good as individual stocks for predictable income because they're usually buying, selling, and rebalancing throughout the year. That can potentially interrupt dividend growth at inopportune times.

Some dividend ETFs, however, are still able to deliver a solid track record. Even with those possible hiccups, they've still been able to deliver years of steady dividend growth for investors. One fund that's been able to accomplish this is the iShares Core Dividend Growth ETF (NYSEMKT: DGRO). Since its inception in 2014, it's been able to increase its annual dividend payout every year.

How does it do it when so many other dividend ETFs fail? Let's break it down.

Image source: Getty Images.

What is the iShares Core Dividend Growth ETF?

The fund tracks the Morningstar U.S. Dividend Growth Index. It's comprised of dividend-paying stocks that meet three primary criteria:

1. Must pay a qualified dividend.
2. Must have five-plus years of consecutive dividend growth.
3. Must have a payout ratio of less than 75%.

These criteria help accomplish a few things. First, they help ensure that the companies the fund invests in have committed to paying and increasing their dividends over time. Second, it screens companies to make sure they have a higher likelihood of sustaining that dividend growth. It's not a particularly stringent set of qualifying criteria, but it's enough to screen out many of the bad apples that can hurt dividend durability.

This strategy doesn't produce a portfolio that's as exciting as a tech ETF, but it does create one full of durable, successful companies that generate strong cash flows and steady earnings. Top holdings currently include ExxonMobil, JPMorgan Chase, Johnson & Johnson, Microsoft, and Apple.

Its expense ratio of 0.08% is among the lowest in this category, and its current yield of 2.14% is more than double that of the S&P 500 (SNPINDEX: ^GSPC).

More than a decade of dividend growth

The iShares Core Dividend Growth ETF's history shows not just increasing dividend payments, but payouts rising at a pretty healthy clip.

Data source: iShares.

The fund's 10-year annual dividend growth rate of approximately 8.6% easily eclipses the 5.6% dividend growth rate of the S&P 500. That kind of growth rate helps investors retain their purchasing power by growing their income higher than the rate of inflation.

Why the iShares Core Dividend Growth ETF is still undervalued

This fund trades at roughly a 21% valuation discount to the S&P 500, using the price-to-earnings (P/E) ratio as a measuring stick. That's largely a function of the difference in tech sector allocations. The iShares ETF only has about half the tech weighting that the index does, and overweights several sectors that historically come with lower valuations.

Its current trailing-12-month P/E ratio is around 20.6. That's higher than its 10-year median ratio of 18.3, but most funds are trading above their historical averages.

The one value argument I'm intrigued by right now is the heavier allocations to both financials and healthcare. These two sectors have been underperformers, but have potential catalysts in place that could turn them around.

For example, financials could benefit from a Federal Reserve that no longer looks like it's going to cut interest rates sharply in 2026. With the U.S. economy still growing and inflation stuck above the central bank's target, there simply isn't an incentive for the Fed to move rates much. Since higher rates mean higher margins for banks, we could see better financial performance ahead.

Healthcare could benefit from a potential deregulation trend. Regulatory oversight in the healthcare space can involve heavy compliance costs and hindrances to the sweep in which new developments, innovations, and medicines can be implemented and/or brought to market. The Trump administration has boasted that it took 646 deregulatory actions in fiscal year 2025, realizing more than $200 billion in cost savings. Healthcare has been a relatively modest beneficiary of this trend thus far, but the regulatory rollbacks at the Food & Drug Administration last year show that this sector is on the radar.

Overall, this ETF has a strong history of dividend growth, and its proven strategy of targeting companies with sustainable future dividend growth should help it to keep delivering for shareholders.

JPMorgan Chase is an advertising partner of Motley Fool Money. David Dierking has positions in Apple. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, and Microsoft. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.