“That said, there is a compelling case for investing in stocks with durable competitive advantages and strong profitability, including their tendency to outperform in tough economic environments,” Bryan added.
Specifically, academic research has revealed that stocks with strong profitability have historically outperformed less profitable companies. Additionally, Bryan argues that most investors may not appreciate the long-term sustainability of highly profitable companies and would then undervalue the firms, which may leave the stocks with a return advantage.
Alternatively, investors may find that some dividend stock ETFs also lean toward quality names. For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. stocks that have increased dividends for at least 10 consecutive years, and components typically enjoy durable competitive advantages. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks that showed consistent dividend payouts for at least 10 consecutive years and targets stocks with high return on equity, high cash flow to debt, high dividend yields and strong dividend growth. [Dividend Stock ETFs Moving Back into the Limelight]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.