Due in part to a spate of negative dividend actions in the energy and materials sectors, S&P 500 dividend growth, though still expected to remain solid, is also expected to slow in 2016. As economic growth slows and observers downgrade earnings forecasts, company cash payouts, along with stock buybacks, have also lessened.
Knowing that slower dividend growth could be the new normal this year means dividend investors should emphasize the exchange traded funds that hold companies that have previously displayed the ability to boost payouts during myriad market environments.
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
There other points in VIG’s favor. For example, it’s trailing 12-month dividend yield is just 2.34%, meaning this is not a “high-yield” ETF. On a related note, VIG is not heavily allocated to rate-sensitive sectors such as telcom and utilities. Additionally, VIG charges just 0.1% per year, an expense ratio that is lower than 90% of rival funds.
“I believe the most meaningful headwind for VIG in both dividends and share price appreciation is the impact of a strong dollar. While the individual companies are often considered domestic companies, they have global operations and a strong dollar results in materially weaker earnings due to the translation impacts. That could hold down earnings and cause the dividend payout ratios for companies to look higher and therefore cause some investors to question the ability of the companies to generate more growth in earnings and dividends,” according to a Seeking Alpha analysis of the ETF.
In a sign that plenty of VIG’s 180 holdings have dividend increase well in excess of 10 years, some of the fund’s marquee holdings, including Dow components Coca-Cola (NYSE: KO), Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG), are dividend aristocrats. Dividend aristocrats are those S&P 500 members that have increased dividends for at least 25 consecutive years.
Including dividends paid, VIG has trailed the S&P 500 over the past three years as the dividend ETF is up 29.2% over that period compared to a 40% gain for the benchmark U.S. equity index.
Vanguard Dividend Appreciation ETF
