Seasoned income investors know that dividends make a significant difference when it comes to a portfolio’s long-term performance. Even more important than a company’s ability to pay a dividend is its ability to consistently raise the payout over time.
So perhaps it is not a coincidence that stocks with the longest dividend increase streaks, such as Coca-Cola (NYSE: KO), Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG), are also among the most widely held stocks by institutional and retail investors.
Undoubtedly, dividend growth is attractive, but chasing that growth also means incurring single stock risk. The Reality Shares DIVS ETF (NYSEArca: DIVY), a new ETF out Thursday courtesy of San Diego-based Reality Shares, helps ameliorate that single stock risk while still delivering dividend growth exposure to investors.
DIVY is not your grandfather’s dividend ETF. Rather, the new fund employs an array of strategies in an effort to generate long-term capital appreciation. DIVY’s holdings can include “listed option contracts, dividend swaps, futures and forwards on indexes of Large Cap Securities or exchange traded funds (“ETFs”) designed to track large cap securities indexes,” according to Reality Shares.
Translation: Unlike currently available dividend focused products, DIVY does not seek to produce returns based on changes in the stock market price of a portfolio of dividend-paying securities and does not generate dividend income.
Actively managed, DIVY can purchase index options contracts in an effort to build a portfolio that “is designed to change based primarily on changes in the expected dividend values reflected in the option prices. These option combinations are designed to reflect expected dividend values and eliminate the Fund’s exposure to changes in the trading prices of the Large Cap Securities,” according to Reality Shares.
Such strategies are not uncommon on professional trading desks. For example, professional traders use dividend swaps, which trade on over-the-counter derivatives markets, which consist of multiple fixed payments from one party to a counterparty.