Amid still sturdy dividend growth in the U.S. and investors' preference for defensive strategies due to recent market turmoil, some dividend exchange traded funds are proving less bad than broader market strategies.
To that point, it's dividend growth strategies that are looking somewhat sturdy. For example, the iShares Core Dividend Growth ETF (NYSE: DGRO) fell 5.10 percent in May compared to a loss of 5.67 percent for the S&P 500.
The $7 billion DGRO, which turns five years old next week, follows the Morningstar US Dividend Growth Index. Companies in that index must have at least five years of uninterrupted dividend growth. Other qualifiers include the exclusion of companies with dividend yields in the top 10 percent of the index's selection universe and a mandate that companies with payout ratios of more than 75 percent are excluded.
“The uncertainty of market prices is one of the reasons investors have often relied on dividends: The compounding effects from the reinvestment of dividends have had a significant impact on portfolio returns over the long run,” said BlackRock in a recent note.
Why It's Important
Dividend growth ETFs usually differ noticeably from high-yield rivals. High dividend strategies are often heavily allocated to real estate and utilities stock. Funds such as DGRO, though they sport lower yields, take different approaches in an effort to source payout growth, not yield.
Home to 480 stocks, DGRO allocates over 34 percent of its weight to the financial services and technology sectors, two of the leading sources of S&P 500 dividend growth since the end of the global financial crisis. Conversely, the high-yield utilities and real estate sectors combine for barely more than 5 percent of the fund's weight. A more sanguine interest rate environment is also benefiting dividend stocks this year.
“That should help shore up the market value of dividend stocks,” said BlackRock. “What’s more, with rates looking like they will stay low for the foreseeable future, equity dividend yields continue to be an attractive option for those looking for a source of income.”
Other benefits to dividend growth strategies included reduced volatility and the possibility of less downside capture when markets swoon.
“The ability to consistently pay, or grow dividends is no easy feat,” according to BlackRock. “It typically implies that a company has stable or rising earnings, consistent cash flow, a proven business model and disciplined management teams. These characteristics also tend to align with greater resilience over business and market cycles.”
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