The value style has outperformed growth over the past few months, and investors who are positioning for a potential long-term shift should look to dividend growth exchange traded funds to capitalize on the trend.
For instance, the SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion. SDY has a 2.44% 12-month yield.
Year-to-date, SDY increased 11.1% while the SPDR S&P 500 Growth ETF (NYSEArca: SPYG), which focuses on more growth oriented stocks taken from the S&P 500, gained 2.0%. The outperformance reflects a reversal from 2015 when growth outperformed value by almost 11 percentage points. Value has underperformed growth for over eight years, the longest period since records were kept going back to 1926.
When looking into the value style, ETF investors may want to focus on the dividend growth strategy.
“We favor a different approach to seeking value by targeting a factor that is closely linked to the precepts of value investing: dividends,” State Street Global Advisors said in a note. “However, we prefer a dividend strategy that focuses on dividend growers rather than yielders.”
Specifically, SSgA argues that high dividend yields could reflect distressed companies and a falling stock price, so these high-yield stocks are producing attractive yields for a reason – high risk.
[related_stories]On the other hand, dividend growers provide an aspect of quality and growth since these firms have a long track record of raising dividends. Companies that have consistently raised dividends also exhibit stable balance sheets and consistent earnings growth.
“When a company is able to reliably boost its dividend for years or even decades, this may suggest it has a certain amount of financial strength and discipline,” SSgA said. “Bottom line: Dividend growers can provide the right combination of value and growth.”
The quality tilt has also helped SDY avoid potential value traps or deeply oversold areas like energy, which may be currently experiencing a “junk rally.” SSgA argues that energy and commodity-related areas of the market could remain volatile due to uncertainty over the current supply and demand outlook.
SDY includes a small 3.2% energy tilt, along with 11.1% in materials.
Additionally, investors may look to a number of other ETFs 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 2.18% 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 2.93% 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 1.92% 12-month yield.
SPDR S&P Dividend ETF