Dividend exchange traded funds have helped investors generate attractive long-term returns. However, investors may want to pare down expectations as dividend growth could slow ahead.
While S&P 500 dividend payouts continue to set records, the pace of dividend growth has decelerated, with companies less keen to pump shareholder returns in light of a global slowdown, the Financial Times reports.
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.
“We’re not seeing many of the dividend increases we’d see in the past,” Jack Ablin, chief investment officer of BMO Private Bank, told CNBC. “Part of it was companies hoarding cash and it finally took someone like Carl Icahn to shake up Apple and get something moving. But left to their own devices, company management really does not want to stick their neck out.”
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]
In a continued low-yield environment, investors may turn to stocks that have consistently raised dividends as a way to generate more attractive returns. For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years and has a 2.44% 12-month yield. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 3.2% 12-month yield. 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 Watch]
“The chances that dividend growth is in line with the last five years over the next couple of years is pretty remote,” Nicholas Colas, chief market strategist at Convergex, told CNBC. “Corporations want to see top-line growth before they start estimating earnings power.”
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.