Investors seeking a steady yield-generating exchange traded fund to help diversify their portfolios in a volatile year can look to the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) for quality stock market exposure and sustainable dividends.
“By investing in dividend growth strategies, you not only get high-quality companies that have delivered strong total returns, you also get the potential for attractive yield,” according to ProShares. “If you look at effective yield, you’ll see dividend growth strategies have significantly outperformed the broader market.”
NOBL, which has accumulated $1.39 billion in assets under management, shows a 2.03% 12-month yield and a 0.35% expense ratio.
The dividend ETF has been outperforming the broader equities market. Year-to-date, NOBL rose 5.5% while the S&P 500 index was only 0.9% higher. Over the past year, NOBL increased 4.3% as the S&P 500 dipped 0.6%.
NOBL’s 17.2% tilt toward industrials and 10.4% position in materials helped the ETF capitalize on the recent rally in more undervalued sectors of the market. Additionally, the fund holds large positions in more conservative or defensive sectors, including 12.9% in health care and 25.5% in consumer staples.
[related_stories]The recent selling pressure in the equities market has also made dividend stock plays more attractive, especially as the Federal Reserve projects only two interest rate hikes this year, compared to previous expectations for four rate hikes. As the S&P 500 index experiences its worst start to a new year since 2009, yield spread between the benchmark and 10-year Treasuries widened to their largest spread in a year.
The difference between U.S. equity dividend yields and government bonds can be used as a proxy for valuation comparison between the two assets. On average over the past year, the yield on 10-year Treasuries exceeded that of the S&P 500 dividends by 7.7 basis points. However, the recent volatility helped push yields on 10-year Treasury notes below 2%.
NOBL, which tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers as opposed to more high-yield focused funds that may contain companies on more precarious financial positions.
High-yield equity funds can be enticing to income-seeking investors, but the higher yields come with higher the risks and are often unstable, writes Kevin McDevitt, a senior analyst for Morningstar.
Alternatively, McDevitt argues that dividend growth is a more important factor for long-term dividend investors.
“Dividend growth plays a big role in determining total income over the life of an investment,” McDevitt said. “As a general guideline, the higher a company’s, and by extension a fund’s, yield, the less quickly it will grow over time. Over the short run, this initial yield matters more than dividend growth. But as the time horizon grows, dividend growth has a greater impact on the overall payout.”
ProShares S&P 500 Aristocrats ETF