While the U.S. isn’t heading toward a recession, growth will likely remain muted over the near term. Consequently, investors may turn to exchange traded fund strategies that target high-quality names, such as the group of consistent dividend growers.
On the recent webcast, Dividend Growers: High Quality Companies for a Low Growth Environment , Sam Stovall, Managing Director and U.S. Equity Strategist at S&P Global Market Intelligence, outlines a so-called Wall of Worry that is weighing on investment sentiment, including an aging bull market, an earnings recession, a Federal Reserve rate hike, volatility in the equities market, depressed oil prices, lone-wolf terror attacks, an upcoming U.S. presidential election and a post-Brexit environment. Nevertheless, the equities may have more room to run.
“Stocks can still climb, provided EPS continues to recover and inflation remains subdued,” Stovall said.
Given all the potential hurdles, Stovall anticipates seasonal price softness and volatility ahead in the third quarter. The strategist also pointed out that the third quarter has been a seasonally weak period for the equities market. Looking at the average S&P 500 sector price performance by quarters since 1990, the third quarter registered an average -0.7% return, with only the consumer staples, health care and utilities sectors turning out a positive return.
Consequently, during periods of elevated uncertainty but continued growth, investors may seek out more sturdy names.
“Investors tend to favor stocks with above-average consistencies of raising EPS and dividends during challenging times,” Stovall added.
Simeon Hyman, Head of Investment Strategy at ProShares, pointed to dividend growth ETF strategies as a way to target a group of high-quality companies.
In a survey of advisors on the webcast, 74% of respondents signaled they were interested in increasing their allocations toward dividend growth strategies.
“Quality and growth are the key,” Hyman said. “Companies that grew their dividends outperformed companies that didn’t. Companies that consistently grow their dividends tend to be high-quality with strong growth potential. These companies have been able to withstand repeated periods of market turmoil and still deliver strong returns with lower volatility.”
For instance, the ProShares S&P 500 Aristocrats ETF (NOBL) follows the S&P Dividend Aristocrats Index, which is comprised of S&P 500 companies that have increased their dividends for at least 25 consecutive years. These dividend growers also exhibit common traits of high quality companies, such as a history of profit and growth, strong fundamentals, stable earnings, commitment to shareholders and a sound management team.
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The S&P 500 Dividend Aristocrats Index “provides a way to screen for robust, growing companies that have historically provided strong total return with less volatility,” Hyman added.
Since its inception, the S&P 500 Dividend Aristocrats Index has outperformed the S&P 500 Index by over 3 percentage points while experiencing lower volatility.
The higher performance and lower volatility is an attractive combination for many investors. On the survey of advisors, 46% of respondents said they look to risk-adjusted performance when investing in dividend strategies, followed by 27% looking for yield and anther 27% seeking absolute performance.
Kieran Kirwan, Director of Investment Strategy at ProShares, pointed out that the dividend aristocrats indexing methodology helped investors limit the drawdowns during the recent sell-off during the start of the year.
“There’s an elite group of companies that have continued to deliver positive earnings growth in a challenging earnings environment – the S&P 500 Dividend Aristocrats, companies that have increased dividends every year for at least 25 consecutive years,” Kirwan said. “For the first quarter of 2016, the S&P 500 Dividend Aristocrats delivered earnings growth of 2.4% – more than 9 percentage points greater than the broader market.”
Kirwan also pointed out that the dividend approach also produced significant outperformance in the small- and mid-cap categories as well.
Investors interested in a dividend growth small- and mid-cap ETF strategy can consider the ProShares Russell 2000 Dividend Growers ETF (SMDV) , which tracks the Russell 2000 Dividend Growth Index of small-cap firms with dividend increase streaks of at least a decade, and the ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL) , which tracks the S&P MidCap Dividend Aristocrats Index of mid-cap dividend paying companies that have raised payouts for 15 consecutive years.
Financial advisors who are interested in learning more about dividend growth strategies can watch the webcast here on demand.