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5 Quality Dividend ETFs Crushing the Market on Tax Reform

Is (HRS) Outperforming Other Computer and Technology Stocks This Year?

While a rise in interest rates would diminish the attractiveness of dividend stocks, investors are chasing these on optimism surrounding the biggest tax overhaul in decades. In particular, stocks that have a long track of profitability, history of raising dividend year over year along with prospects of further increases, good liquidity, and some value characteristics will likely outperform.

This is especially true, as lower corporate taxes would boost companies’ profitability leading to fatter and faster dividend hikes. Additionally, the proposed tax policy will allow companies to bring back their overseas cash at reduced rates that will in turn pave the way for special dividends (read: ETFs to Bet on the Final Tax Bill: What Hot, What's Not).  

Apart from the excitement surrounding tax cut, quality enriched stocks generally outshine in a rising rate environment. Additionally, quality dividend stocks have a long history of outperformance compared with other high-yield dividend paying stocks, which are currently being ruffled by rising rates.

Further, these stocks have a strong potential for growth with better risk-adjusted returns over the long term. This is because quality dividend stocks offer safety and stability in a choppy stock market as they ensure regular income to investors in the form of dividends. At the same time, they also have the potential for capital appreciation when the market is on an upswing. Investors should note that these are mature companies that are less vulnerable to the large swings in stock prices, and therefore well protected than others in a tumbling market.

As a result, we have highlighted five ETFs that offer better dividend growth opportunities compared with the other products in the space but might not necessarily have the highest yields. These funds hit their all-time highs in the last trading session and have the potential to move even higher given that the enactment of tax reform in 2018 is most likely (read: 4 Quality ETFs & Stocks for Market-Beating Returns).

WisdomTree U.S. Quality Dividend Growth Fund DGRW

This fund tracks the WisdomTree U.S. Quality Dividend Growth Index and offers diversified exposure to U.S. dividend-paying stocks with both growth and quality characteristics like long-term earnings growth expectations, and three-year historical averages for return on equity and return on assets. It has gathered $1.9 billion in its asset base and trades in good volume of nearly 203,000 shares per day. The ETF charges 28 bps in fees per year from investors and holds 298 securities in its basket, with each accounting for no more than 5.3% share. From a sector look, it provides double-digit allocation to information technology, industrials, health care, consumer discretionary and consumer staples. The fund hit its all-time high of $41.88 per share, representing a gain of about 28.3% in the year-to-date time frame. It has a Zacks ETF Rank #3 (Hold).

ProShares S&P 500 Aristocrats ETF NOBL

This product provides exposure to companies that raised dividend payments annually for at least 25 years by tracking the S&P 500 Dividend Aristocrats. It holds 51 securities in its basket with a tilt toward consumer staples firms that account one-fourth of the portfolio. Other sectors, namely industrials, healthcare, and consumer discretionary receive a double-digit exposure each. NOBL has amassed $3.5 billion in its asset base and trades in a volume of around 175,000 shares a day on average. It has an expense ratio of 0.35%. The fund reached its all-time high of $64.33 per share, and has added 20.3% so far this year. It has a Zacks ETF Rank #3 (read: An Investor's Guide to Dividend Aristocrat ETFs).

FlexShares Quality Dividend Index Fund QDF

This ETF follows the Northern Trust Quality Dividend Index and seeks to maximize exposure to quality and dividends while maintaining a beta near 1. In total, it holds 149 securities in its basket with each accounting for less than 3.4% share. Information technology, financials, industrials, and healthcare are the top four sectors with double-digit exposure each. QDF is popular with AUM of $1.9 billion and has an expense ratio of 0.37%. Volume is moderate exchanging nearly 68,000 shares in hand per day on average. The product scaled a fresh high of $45.63 per share, and has gained 17.2% in the year-to-date time frame.

Schwab U.S. Dividend Equity ETF SCHD

With AUM of $7 billion, this product offers exposure to the 117 high dividend yielding U.S. companies that have a record of consistent dividend payments supported by fundamental strength based on financial ratios and ample liquidity. This can be easily done by tracking the Dow Jones U.S. Dividend 100 Index. The fund is well spread across securities with none holding more than 4.8% of assets. However, it is slightly tilted toward information technology and consumer staples sectors with 21.5% share each followed by industrials (15.2%) and consumer discretionary (12.8%). The fund trades in solid volume of more than 526,000 shares a day and is one of the low cost choices in the dividend space, charging 7 bps in fees per year. The ETF touched an all-time high of $51.33 per share, and has returned about 20.1% so far this year (read: 5 Ways to Play Growing Dividends With ETFs).

First Trust NASDAQ Rising Dividend Achievers ETF RDVY

This fund provides exposure to 50 U.S. stocks with a history of rising dividend and that are expected to continue doing so in the future. In addition, it also screens for stocks with rising earnings per share and cash to debt ratio greater than 50%. This can be done by tracking the NASDAQ Rising Dividend Achievers Index. All the securities are well spread out with each accounting for less than 2.1% of total assets. However, the product has a certain tilt toward financials with 29.9% share, closely followed by information technology (20.1%). The ETF has accumulated $347.6 million in its asset base and sees a moderate volume of 71,000 shares a day on average. Expense ratio comes in at 0.50%. The fund has gained 23.1% in the year-to-date time frame and hit a fresh high of $30.21 per share. It has a Zacks ETF Rank #3.

Bottom Line

These products are outperforming the broad market fund since tax reform talks resurfaced and are expected to continue given that the Trump will likely sign the tax bill by the end of this week to make it a law next year.

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WISTR-US QD (DGRW): ETF Research Reports
PRO-SP5 ARISTOC (NOBL): ETF Research Reports
SCHWAB-US DV EQ (SCHD): ETF Research Reports
FT-NDQ RIS DV A (RDVY): ETF Research Reports
FLEXS-QLTY DIV (QDF): ETF Research Reports
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