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5 Ways to Play Growing Dividends With ETFs

Sweta Killa
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Dividends have been consistent constant source of income for investors seeking regular returns during both bull and bear markets. According to various studies, dividends accounted for more than 40% of the total returns over the longer term.

The dividend-paying securities offer both safety, in the form of payouts, and stability, in the form of mature companies that are less impacted by the large swings in stock prices. This is especially true as companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis (see: all the Large Cap ETFs here).

Q3 Dividends Sits At Record High

Per S&P Dow Jones Indices, dividend net increases (increases less decreases) soared 152% to $15 billion in the third quarter as 438 companies reported dividend hikes while 93 reported decreases. As such, dividend payments for the S&P 500 were a record $105.4 billion in the quarter.

The trend is expected to continue in the coming months as most large companies have huge cash piles on their balance sheet and are in a position to increase payouts to their shareholders. Additionally, a steady rise in interest rates as well as Trump’s proposed tax reform or repatriation would stimulate dividend growth, going forward. Notably, 2017 dividends are on track to post a gain of 7%, up from 5.6% growth last year (read: 6 ETFs Set to Win on Trump's Tax Reform).

Investors should also note that a company that consistently increases its dividends has stronger fundamentals, suggesting rising cash flows, good liquidity and a strong balance sheet.

How to Play

Given this, investors could tap growing dividends in the form of ETFs. Below, we have highlighted five dividend ETFs that offers excellent dividend growth potential, any of which could be a solid pick for investors in the long term:  

Vanguard Dividend Appreciation ETF VIG

This is the largest and most popular ETF in the dividend space with AUM of $25.3 billion and average daily volume of about 571,000 shares. The fund follows the NASDAQ US Dividend Achievers Select Index, which is composed of high-quality stocks that have a record of growing dividend year over year. It holds 185 securities in the basket with none accounting for more than 4.5% share. The fund charges 8 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 Cheap Dividend ETFs for an Uncertain Market).

SPDR S&P Dividend ETF SDY

With AUM of $15.8 billion and average daily volume of 475,000 shares, this fund provides a well-diversified exposure to 107 U.S. stocks that have been consistently increasing their dividends every year for at least 20 years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. Each holding accounts for less than 2.3% of assets. The fund charges 35 bps in fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Schwab U.S. Dividend Equity ETF SCHD

With AUM of $6.1 billion, this product offers exposure to the 110 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 components with none holding more than 4.8% of assets. It charges 7 bps in annual fees and trades in solid volume of more than 519,000 shares a day. It has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Core Dividend Growth ETF DGRO

This fund provides exposure to companies having a history of consistently growing dividends by tracking the Morningstar US Dividend Growth Index. It holds 421 stocks in its basket with none accounting or more than 3.03% share. The fund has accumulated $2.2 billion in its asset base and trades in good volumes of about 456,000 shares. It charges 8 bps in fess per year and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Best ETF Strategies for a Hawkish Fed).

ProShares S&P 500 Aristocrats ETF NOBL

This product provides exposure to 51 companies that raised dividend payments annually for at least 25 years by tracking the S&P 500 Dividend Aristocrats. It has amassed $3.1 billion in its asset base and trades in a volume of around 185,000 shares a day on average. It has an expense ratio of 0.35% and has a Zacks ETF Rank #3 with a Medium risk outlook.

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