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4 Safe Dividend Growth ETFs & Stocks for a Faltering Market

Sanghamitra Saha
Tilly's (TLYS) closed the most recent trading day at $16.18, moving -0.98% from the previous trading session.

With investors puzzled about the future course of stock market momentum given the rising rate worries, investors must be wondering where to park their money. With a spike in yield, chances are high that both equities and bonds will lose their value.

Goldman Sachs has already forecast that stocks may nosedive 25% if 10-year bond yields hit a high of 4.5% and a more than 95% probability of a Fed rate hike in March. A senior portfolio manager at Sit predicts that the Fed will raise rates four times this year, one more than what has been penciled so far by the central bank.

While rising rates will lower the price of bonds, fears of faster ceases in cheap money inflows will likely hurt stocks. Against this scenario, some safe or value picks are necessary.

BofA stock strategist noted that “while we do not see a set level at which interest rates have begun to hurt equities, we may be getting closer to exiting the “sweet spot.” The strategist also indicated that “historically, the probability of loss for the S&P 500 increases when the 10-year Treasury yield rises above 3%.”

With the benchmark Treasury yield hitting a high of 2.94% this month and currently at 2.86% as on Feb 26, 2018, a 3%-yield is not a far behind. So, let’s find what could be safer stock investing options right now.

Target Dividend Aristocrats

Dividend-paying securities can be steady sources of current income for investors when returns from equity markets are at risk. But as per the analysis from Bank of America Merrill Lynch, both high-yield and no-yield can get hurt in a rising rate environment (read: Earn 5% Plus Yield With These ETFs).

So, it is better to tap “companies with modest yields and plenty of potential to grow their payments. Typically, dividend growers trade at a 20% premium to high yielders, but right now the growers are slightly cheaper,” per Bank of America Merrill Lynch.

Dividend aristocrats are the blue-chip dividend-paying companies, which have a long history of raising dividend payments year over year. These provide hedge against economic uncertainty and are high-quality in nature.

Further, many U.S. companies hoard a pile cash on their balance sheets and are likely to increase their dividend payouts, especially given the passing of the tax reform. The Trump administration proposed a move from the current worldwide tax system to a territorial system, allowing companies to send their offshore profits back to the United States without extra taxes.

Investors are expecting tax savings to result in fatter and faster dividend hikes and more stock buybacks. Morgan Stanley’s analysts predict that 43% of the total tax savings will go to dividends and buybacks (read: How Will Tax Reform Affect Buyback and Dividend ETFs?).

ETF Picks

Below we highlight four ETFs that comprise stocks with a long history of increasing dividends (read: 5 Overlooked Smart Beta Dividend ETFs Worth Buying Now).

Vanguard Dividend Appreciation ETF VIG

The underlying NASDAQ US Dividend Achievers Select Index consists of common stocks of companies that have a record of increasing dividends over time. The fund is heavy on Industrials (33.5%) followed by Consumer Services (14.7%) and Consumer Goods (13%). The fund charges 8 bps in fees.

Schwab U.S. Dividend Equity ETF SCHD

The underlying Dow Jones U.S. Dividend 100 Index measures the performance of high dividend-yielding stocks issued by U.S. companies that have a record of consistently paying dividends. The fund is heavy on Consumer Staples and Information Technology.

ProShares S&P 500 Dividend Aristocrats ETF NOBL

The underlying S&P 500 Dividend Aristocrats Index picks companies that are currently members of the S&P 500 and have increased dividend payments each year for at least 25 years. Consumer Staples (24.1%), Industrials (14.5%), Health Care (11.5%) and Consumer Discretionary (11%) have a double-digit weight each.

iShares Core Dividend Growth ETF DGRO

The underlying Morningstar US Dividend Growth Index is composed of U.S. equities with a history of consistently growing dividends. Financials, Technology, Health Care, Industrials, Consumer Staples and Consumer Discretionary have a double-digit weight.

Stock Picks

We screened stocks on the basis of Zacks Rank #1 (Strong Buy), VGM Score of A or B and a 5-year historical dividend growth rate of at least 20%.

KapStone Paper and Packaging Corporation KS

It operates businesses in the paper, packaging, forest products and related industries. The Zacks Industry Rank is in the top 19% and VGM Score of A. Its five-year historical dividend growth rate is 32.9%.

Huntington Ingalls Industries Inc. HII

The company builds nuclear and non-nuclear ships for the U.S. Navy and Coast Guard and provides after-market services. It belongs to a top-ranked Zacks Industry (top 24%) and has a VGM Score of B. Its five-year historical dividend growth rate is 51.3%.

ArcBest Corporation ARCB

This provider of freight transportation services and solutions comes from a top-ranked Zacks Industry (top 2%) and has a VGM Score of A. Its five-year historical dividend growth rate is 31.7%.

Air Lease Corporation AL

This aircraft leasing companybelongs to a top-ranked Zacks Industry (top 37%) and has a VGM Score of B. Its five-year historical dividend growth rate is 32.45%.

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ArcBest Corporation (ARCB) : Free Stock Analysis Report
 
Huntington Ingalls Industries, Inc. (HII) : Free Stock Analysis Report
 
ISHRS-CORE DG (DGRO): ETF Research Reports
 
VANGD-DIV APPRC (VIG): ETF Research Reports
 
PRO-SP5 ARISTOC (NOBL): ETF Research Reports
 
KapStone Paper and Packaging Corporation (KS) : Free Stock Analysis Report
 
SCHWAB-US DV EQ (SCHD): ETF Research Reports
 
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