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A Compelling ETF Play for Dividend Investors

This article was originally published on ETFTrends.com.

Dividend stocks and ETFs faced plenty of challenges in 2018 as the Federal Reserve boosted interest rates four times, but S&P 500 dividend growth was still impressive.

The “average Q4 2018 dividend increase in the S&P 500 was 10.24 percent, down from 10.41 percent during Q4 2017; 2018 average is 13.48 percent, up from 2017’s 11.36 percent,” according to S&P Dow Jones Indices.

Last year, high dividend strategies, including the Vanguard High Dividend Yield ETF (VYM) , struggled against amid the Fed's tightening regime, but VYM remains a compelling option for dividend investors.

Investors may also consider consistent dividend growers as a way to gain exposure to this group of quality companies as dividend growers and high quality stocks share a number of similar characteristics. While VYM is advertised as a high-yield dividend ETF, the truth is the fund takes steps to mitigate some of the risks associated with high-yield stocks.

VYM, one of the largest U.S. dividend ETFs, “tracks more than 400 of the highest-yielding stocks on the market, showering its investors with nearly 60% more in dividends than they would earn by investing in S&P 500 index funds,” according to Motley Fool.

Dividend Growth Opportunities

While VYM is framed as a high-yield dividend fund, it offers investors exposure to a wide array of stocks with histories of steadily increasing payouts, which is something to consider amid solid dividend growth expectations for 2019.

“Based on their current payout policies, S&P 500 2019 dividends already have a 3.5-percent tailwind built in, setting the stage for potentially another record year, with the increase again expected to outpace wage growth and inflation,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Related: Demand for Smart Beta ETF Strategies Continues to Grow

Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.

“Second, the fund offers a high, but realistic, dividend yield. Vanguard High Dividend Yield ETF has an SEC yield of about 3.2%, which is 1.2 percentage points higher than you'd earn holding a similarly low-cost S&P 500 fund. It's enough to make a difference in the income you earn from your portfolio, but it's not so high that it's a giant red flag, either,” according to Motley Fool.

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