Investors can find many various options for income generation, but some dividend-related exchange traded funds have been tailored to provide exposure to sustainable, quality stocks that have a history of growing dividends.
For instance, the newly launched ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) tries to reflect the performance of the S&P 500 Dividend Aristocrats Index. Looking at historical data, the underlying S&P 500 Dividend Aristocrats Index has provided total annual returns of just under 10% since May 2005, outpacing the broader S&P 500 by a little over 3% per year, reports Chris Taylor for Reuters. [ProShares Aristorcrats ETF Tracks Quality S&P 500 Dividend Payers]
“It appeals to two things investors are looking for, outperformance and low volatility,” Michael Sapir, CEO of ProShare Advisors, the investment advisor to ProShares, said in the article. “It’s an alternative to an S&P 500 index fund, or to actively-managed large-cap funds, and appeals to people who are looking for a good source of income.”
Additionally, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. firms that have raised annual dividends each year for the past 10 years and applies an “additional proprietary criteria” in its weighting methodology. VIG has a 2.0% 12-month yield. The ETF has gained an annualized return of 15% over the past five years. [Dividend Reinvestment Via ETFs]
The iShares Select Dividend ETF (NYSEArca: DVY) includes 100 stocks from the Dow Jones U.S. Index that have paid annual dividends and provided dividend-per-share growth over the past five years. As a precaution against unsustainable dividends, the ETF excludes companies without a five-year average dividend/earnings-per-share ratio of at 60% or less. DVY has a 3.1% 12-month yield. The fund has gained an annualized 15.0% over the past five years and 6.7% over the past 10 years.
Lastly, the SPDR S&P Dividend ETF (NYSEArca: SDY) includes the highest yielding stocks from the S&P Composite 1500 Index that have increased dividends every year for the past 20 consecutive years. SDY has a 2.41% 12-month yield. The fund gained an annualized 15.9% return over the past five years.
Dividend ETFs, though, have started to slow down in light of the rising rate environment. [Rising Rates Turn Some Dividend ETFs Into Laggards]
Moreover, investors have been buying these dividend stocks since the financial crisis as a safer investment, driving up valuations.
“The aristocrats are a pretty narrow group, and a lot of people have already piled into that group,” Ed Clissold, U.S. market strategist for Ned Davis Research, said in the article. “A lot of those dividend aristocrat stocks are now over valued.”
Nevertheless, steady dividend stocks have outperformed high-yielding stocks over the long term. According to Ned Davis Research, a high-yield stock portfolio has lagged a dividend growers portfolio by 1.5 percentage points per year over the past 35 years.
For more information on dividends, visit our dividend ETFs category.
Tom Lydon’s client own shares of DVY.