Stock ETF investors may want to look outside traditional income-producing sectors such as utilities and REITs if they want companies that will be able to grow their dividends in the future.

Low bond yields have pushed income-starved investors into stocks. Yet the equity market’s higher-yielding sectors such as REITs, utilities and telecom failed to keep pace with the overall market during the recent rise in interest rates “as their payouts became comparatively less attractive,” says Dan Skelly, equity strategist at Morgan Stanley Wealth Management.

The good news is that dividends appear to be on solid footing even with the recent spike in Treasury yields. Companies have more cash on their balance sheets and over 80% of S&P 500 components are paying dividends, the highest level since 1999. [Dividend ETFs: The ‘Bondification’ of the Stock Market]

“However, we favor dividend-growth-oriented sectors and stocks over purely high yield equities,” Morgan Stanley said. “We note that stocks with modest dividend yields and the potential for higher dividends—as opposed to the highest-yielding stocks—have also produced solid relative returns over market cycles.”

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