With the S&P 500 resting near all-time highs, investors that are concerned about generating further upside might want consider turning to dividend stocks and exchange traded funds. At least that is one way of interpreting some recent advice from Goldman Sachs.
The venerable Wall Street bank expects dividend yield to be the “sole contributor to total return during the next 12 months,” reports Mark Melin for ValueWalk.
Net dividend increases rose $12.6 billion in the first quarter “down from the $17.9 billion increase during the first quarter of 2014. The dollar amount decline equates to a 30.0% year-over-year slowdown in dividend increases. For the 12 months ending March 2015, dividend net increases fell 17.7% to $49.6 billion compared to an increase of $60.1 billion for the corresponding period in 2014,” according to S&P Dow Jones Indices.
Although the first quarter was another sturdy period for payout increases, some dividend ETFs have struggled to keep pace with the S&P 500 this year. Of the four largest U.S. dividend ETFs, none have outpaced the benchmark U.S index this year and only the Vanguard High Dividend Yield ETF (NYSEArca: VYM) is up at least 2%. [Opportunity in a Favored Dividend ETF]
With Treasury yields on the rise, dividend ETFs heavy on consumer staples and utilities have lagged as those rate-sensitive sectors have come under pressure. The $14.8 billion iShares Select Dividend ETF (NYSEArca: DVY) allocates 44% of its combined weight to the utilities and staples sectors. The $4.9 billion iShares Core High Dividend ETF (NYSEArca: HDV) devotes over 30% of its combined weight to staples and utilities stocks.
If yields fall, that would “be positive for shareholders of high dividend yielding stocks in the consumer staples and utilities sectors,” notes S&P Capital IQ. But 10-year yields are rising and DVY and HDV have returned -0.58% and 0.88% this year. [Investors Flee Bond Proxy ETFs]
“In this environment Goldman recommends exposure to stocks with growing dividends, which could be facilitated by record levels of cash on corporate balance sheets that would motivate many firms to increase dividends to shareholders ‘at a much faster clip,’” according to ValueWalk.
Some ETFs that emphasize dividend growth have fared better than their high-yield counterparts. For example, the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) has climbed almost 2% this year. NOBL tracks the S&P 500 Dividend Aristocrats Index, which includes members of the S&P 500 that have increased their dividends for a minimum of 25 consecutive years.
Investors have added nearly $213 million to NOBL this year. While the ETF does allocate 27% of its weight to staples stocks, its largest sector, its utilities weight is scant at less than 1.9%. Additionally, NOBL has the potential to be durable if rates rise due to robust exposure to cyclical sectors, such as consumer discretionary, materials and industrials. NOBL also has an 11.3% weight to the financial services sector. Nearly 15 financial services ETFs made new 52-week highs on Tuesday.
ProShares S&P 500 Aristocrats ETF
Tom Lydon’s clients own shares of DVY.