Rising interest rates will change the way investors allocate an income oriented portfolio, but dividend exchange traded funds that emphasize dividend growth and quality stocks will likely weather the storm.
“Regardless of rates, we prefer dividend ETFs that emphasize dividend growth instead of maximizing yield,” according to Morningstar analyst Abby Woodham.
For instance, the SPDR S&P Dividend (SDY) , Vanguard Dividend Appreciation (VIG) and Schwab U.S. Dividend Equity (SCHD) track quality companies that pay sustainable dividends. Dividend growth typically reflects a positive management culture that emphasizes efficient capital allocation.
Moreover, the underlying holdings have consistently increased payouts over the years. Some even dividend increase streaks that span multiple decades. Companies that increases dividends year-over-year will help investors generate higher total returns.
SDY includes companies that have increased dividends every year for at least 20 consecutive years. VIG and SCHD track stocks that raised dividends dividends every year for the past 10 years. [Dividend ETFs Help Cushion Market Dips]
SDY has a 2.55% 12-month yield, VIG comes with a 2.14% yield and SCH shows a 2.71% yield.
“We also like a quality-tilted dividend strategy during any market cycle,” Woodham added. “You don’t want to reach for yield and end up buying risky companies paying an unsustainable dividend.”
About 50% of VIG and Vanguard High Dividend Yield Index Fund (VYM) , for instance, falls under what Morningstar calls”wide-moat” companies – wide moat refers to companies with a sustainable competitive advantage that helps them stay on top in their respective sectors. Additionally, wide- and no-moat companies cut dividends less frequently and tend to be less volatile. [Dividend ETFs to Guard Against Volatile Markets]
SCHD is also heavily loaded up on quality stocks, with over 60% of its holdings in wide-moat companies.
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SCHD.