Here's the Dividend Growth ETF Most Investors Haven't Discovered Yet

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG), and the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) have more than $280 billion in combined assets under management (AUM). That's half of all assets currently held in U.S. dividend ETFs.

Everybody knows about these ETFs. A lot of people have them in their portfolios. But that also means some equally strong strategies can go unnoticed.

One of those belongs to the WisdomTree U.S. Quality Dividend Growth ETF (NASDAQ: DGRW).

Since its 2013 inception, this fund has done a solid job of identifying quality dividend-paying companies with positive growth profiles. But its newly refreshed selection process, adopted six months ago, uses a more rigorous screening process to identify "growth" and "quality" while shrinking the portfolio size from 300 to 200 names to better identify the "best of the best" stocks.

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How the WisdomTree U.S. Quality Dividend Growth ETF is constructed

This fund tracks the WisdomTree U.S. Quality Dividend Growth Index. It invests in the 200 companies with the best combined ranking for its designated growth and quality factors.

Growth for this index is determined by three main factors:

• The earnings growth forecast (50% of the decision weight).
• The trailing five-year earnings growth (25% of the decision).
• The trailing five-year sales growth (25% of the decision).

Quality for this index is determined by two factors, equally weighted:

• The three-year average return on equity (ROE).
• The three-year average return on assets (ROA).

The one unique feature of the WisdomTree U.S. Quality Dividend Growth ETF is that it weights components from this already selective index by aggregate cash dividends paid. The more it pays shareholders, the greater its weight in the ETF. In practice, this doesn't look significantly different from market-cap weighting, but it does give a more pronounced dividend tilt than many other dividend ETFs.

Why DGRW deserves more investor attention

This ETF is a classic example of how the growth component of the selection criteria is outweighing dividend considerations. By that, I mean companies tied to the AI trade are scoring very well on both growth and quality metrics, thanks to very strong earnings growth. As long as they pay a dividend, they're likely to qualify for this portfolio.

Right now, the WisdomTree U.S. Quality Dividend Growth ETF has about 34% of its weighting in tech stocks. The fund's top six holdings currently are:

1. Nvidia: 8.7%
2. Apple: 5.9%
3. Alphabet: 5.8%
4. Microsoft: 5.3%
5. Oracle: 3.9%
6. Meta Platforms: 3.1%

I probably don't need to tell you that this doesn't look like the typical dividend ETF. These companies are, however, dividend payers, and any strategy that doesn't place greater emphasis on dividends in the selection or weighting process is likely to look like this.

But there is little question that this is also what's in favor with the markets right now. The current 1.2% dividend yield suggests this is less a dividend ETF and more a growth-tilted ETF. But that's helped make DGRW one of the better performers on a total-return basis in the dividend ETF category over the past few months.

This fund is definitely unique within the dividend ETF category. From the perspectives of portfolio composition and diversification, though, it makes it an ETF that more investors should be considering.

David Dierking has positions in Apple, Schwab U.S. Dividend Equity ETF, and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, Oracle, Vanguard Dividend Appreciation ETF, and Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.