Investors may be turning to the quality and value investment themes as dividend exchange traded funds lead the recent rebound.
For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) rose 5.0% Schwab US Dividend Equity ETF (NYSEArca: SCHD) gained 4.9% over the past month while the S&P 500 was 2.2% higher and the Nasdaq Composite was up 0.2%.
These two dividend-focused ETFs may be more appropriate for investors seeking exposure to quality names. VIG targets U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years and comes with a 2.39% 12-month yield. SCHD includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 3.04% 12-month yield.
Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
Alternatively, ETF investors may now choose from a number of multi-factor dividend ETFs that select components based on more than quality dividend payers.
For instance, the Elkhorn FTSE RAFI U.S. Equity Income ETF (BATS: ELKU) follows the performance of high yield U.S. stocks that have been screened for fundamental factors to target sustainable income. The underlying index screens for financial health based on the return on assets, cash flow to short-term debt plus interest expenses and net operating asset scaled by total assets. Additionally, fundamental weights include sales averaged over the prior five years, cash flow averaged over the prior five years, book value at the review date and dividend distribution averaged over the past five years. Over the past month, ELKU was up 4.7%.
The O’Shares FTSE US Quality Dividend ETF (NYSEArca: OUSA), the first exchange traded fund from “Shark Tank” personality Kevin O’Leary, also combines dividends along with the low volatility and quality factors in an attempt to diminish exposure to high dividend equities that have experienced large price declines. OUSA gained 5.4% over the past month.
The FlexShares Quality Dividend Index Fund (NYSEArca: QDF) is a also prime example of an ETF that emphasizes both quality and dividends. QDF emphasizes the quality factor, of which a company’s ability to generate free cash and dividend growth and stability are integral tenants. Another element that has been critical to QDF’s success is the emphasis on management efficiency and a company’s ability to generate cash. QDF was 3.6% higher over the past month.
The Compass EMP US Large Cap High Dividend 100 Volatility Weighted Index ETF (NasdaqGM: CDL) tracks the highest 100 dividend yielding stocks of the CEMP U.S. Large Cap 500 Volatility Weighted Index with four quarters of positive earnings and are weighted based on their daily standard deviation, or volatility. Over the past month, CDL advanced 6.2%.
The SPDR Russell 1000 Yield Focus ETF (NYSEArca: ONEY) also includes a combination of core factors like high value, high quality and low size characteristics, along with a high yield characteristic. ONEY rose 4.2% over the past month.
Additionally, the Legg Mason Low Volatility High Dividend ETF (NasdaqGM: LVHD) should help investors who are seeking new sources of yield in a changing market environment. LVHD selects U.S. equity stocks with relatively high yield and low price and earnings volatility, and the fund also focuses profitable companies. LVHD increased 7.1% over the past month.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.