After tumbling early last week, valuations on some large-cap dividend-paying stocks look attractive, a scenario that could provide income investors with the opportunity to get involved with select exchange traded funds.
Income investors searching for stocks with lengthy histories of payout increases can consider the SPDR S&P Dividend ETF (NYSEArca: SDY) and the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL).
Both ETFs track dividend aristocrats indexes. Dividend aristocrats are those S&P 500 members that have increased dividends for at least 25 consecutive years. The S&P High Yield Dividend Aristocrats Index, the benchmark for the SPDR S&P Dividend ETF, is home 103 S&P 1500 stocks that have dividend increase streaks of at least 20 years. [Getting Consistent Dividend Growth]
“But there’s a reason for the snapback: While stocks, as measured by the S&P 500, aren’t cheap by historical standards at a current 16 times forward earnings, they aren’t expensive, either. The earnings yield, the inverse of the price/earnings ratio, is 6%, or more than 2.5 times the yield on the 10-year Treasury bond,” reports Andrew Barry for Barron’s.
The ProShares ETF tracks the S&P Dividend Aristocrats Index, which requires constituent firms to have dividend increase streaks of at least 25 years while SDY’s holdings have dividend increase streaks of at least 20 years. NOBL has also been an outperforming strategy among dividend stock ETFs or at least has not done as poorly as others.
However, dividend ETF investors should pare expectations ahead as the era of dividend growth stalls.
The record dividend payouts, which hit $351 billion last year, is beginning to slow, with S&P projecting U.S. dividend growth to run behind the 10% pace of the previous three years, reports Eric Rosenbaum for CNBC.
Investors would do well to focus on large-cap dividend payers which have a greater chance of paying a steady yield – according to S&P data, 84% of large-cap stocks offered dividends, compared to 46% of small-cap stocks. Smaller stocks have increased dividends recently, but these same companies were at greater risk of declining.
Another option to consider is the WisdomTree Equity Income Fund (NYSEArca: DHS), which tracks the WisdomTree Equity Income Index, which includes the highest-yielding 30% companies taken from all dividend-paying U.S. stocks that meet minimum size and liquidity requirements. Unlike other dividend ETFs, components are weighted by their total cash dividends projected to pay in the coming year. The fund has a 2.99% 12-month yield.
ProShares S&P 500 Aristocrats ETF
