Dividend exchange traded funds have encountered some struggles this year as market participants have speculated as to when the Federal Reserve will raise interest rates, something the central bank once again passed on doing following the completion of its most recent meeting Wednesday.
According to S&P Dow Jones Indices, S&P 500 average dividend has increased 13.5% so far this year, compared to a 17.3% rise last year.
As economic growth slows and observers downgrade earnings forecasts, company cash payouts, along with stock buybacks, have also lessened. Nevertheless, many dividend stocks and related ETFs are attracting renewed interest as the markets speculate the Federal Reserve will push back on its first interest rate hike in almost a decade. [Low-Yield Environment]
The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion and shows a 2.56% 12-month yield. The ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) only includes companies that have increased their dividends for at least 25 consecutive years and offers a 2.03% 12-month yield.
However, some strategists warn that these same dividend aristocrats may find it harder to continue their dividend growth themes, especially in the energy and materials space where companies are under pressure from the plunge in commodity prices. [Energy ETFs to Watch]
“Here are a few reasons why I feel SDY is a good buy at current levels. The main reason has to do with the Fed’s unwillingness to raise rates from historically low levels. At the beginning of 2015, investors were fairly confident that rates would rise at some point this year, some believed as early as June. This negatively affected dividend ETFs, as investors had piled into funds such as SDY at record levels in search of a higher yield in a low rate environment,” according to a Seeking Alpha post.
SDY is sensitive to rising interest with over 26% of its combined weight allocated to rate-sensitive consumer staples and utilities stocks. However, SDY balances that out by devoting 39 percent of it weight to cyclical financial services and industrial stocks, sectors that often perform well when interest rates climb.
“Even if rates do rise, Yellen has made it clear that the increases will be slow and gradual. She does not intend to spook the market, and the past few years have showed investors that the Fed is being extremely cautious with regards to rates,” according to the Seeking Alpha article.
SPDR S&P Dividend ETF
