Dividend ETFs

Q: Does a company’s past dividend-paying history guarantee future dividend payments?

A: Just as past performance doesn’t guarantee future results when it comes to stocks, just because a company paid generous dividends in the past doesn’t mean that it will continue doing so in the future. In fact, according to one analysis, more US firms decreased dividends  in the first quarter of this year than did during the same period last year.

This is partly why it’s so important to consider index methodology when selecting a dividend-paying ETF. As another one of my colleagues, Dominic Maister, wrote last fall, many dividend indices are based entirely on backward looking data and may merely require included companies have a long history of dividend payouts. This methodology can be problematic for a fund’s performance, however, when top holdings make drastic dividend cuts.

Some indices – like the Morningstar Dividend Yield Focus Index (benchmark for the iShares High Dividend Equity ETF (HDV), which can potentially be a good way to access Russ’ preference for US mega caps) – go a step further and also include sustainability screens in their methodologies. To be selected for the index, a company must have long-term competitive advantages likely to ensure dividend sustainability and growth.

Q: Why consider a dividend-paying stock ETF?

A: There aren’t many people with a solid reputation for selecting individual stocks. This is one reason why many investors may want to consider an ETF or other fund that seeks to replicate the performance of an index of dividend-paying companies. Such funds also may offer potentially lower volatility than a handful of individually chosen stocks and can provide diversification benefits that you’d have to buy many individual stocks to replicate. In addition, dividend focused ETFs, such as the iShares International Select Dividend ETF (IDV), can be used to access dividend payers outside the United States.

Sue Thompson, CIMA, is the iShares Head of Registered Investment Advisor Group.