ETF Trends
ETF Trends

Scores of dividend exchange traded funds are enjoying the fact that the Federal Reserve has yet to raise interest rates this year. Better yet is the fact that many fixed income traders are betting that, at the most, the central bank will boost borrowing costs twice this year, down from expectations calling for four rate hikes at the start of 2016.

That helps explain why a favored dividend ETF such as the SPDR S&P Dividend ETF (NYSEArca: SDY) is up more than 10% year-to-date and more than 16% over the past 90 days, an arguably jaw-dropping showing in such short period for an ETF that holds stocks many investors perceive as slow-moving and low beta.

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. And SDY provides consistent dividend growth via its underlying index, which mandates member firms have dividend increase spanning at least 20 years.

Company stocks that issue high yields may be masking their distressed books or may not be sustainable and are heading for dividend cuts. On the other hand, these quality dividend ETFs try to limit the impact of these value traps by selecting components based on a history of sustainable dividend growth.

Alternatively, investors may choose from a number of multi-factor dividend ETFs that select components based on more than quality dividend payers.

“Dividend funds, such as SDY, which have benefited continuously from these low-rate policies, will continue to benefit. With rate expectations deflating, investors who exited dividend funds expecting bond rates to increase, will now be forced back into dividend funds as the hunt for yield continues,” according to a Seeking Alpha analysis of SDY.

Other dividend growth options among ETFs include the Schwab US Dividend Equity ETF (NYSEArca: SCHD) and the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL). SCHD’s holdings have dividend increase streaks of at least 10 years while NOBL is even more stringent, requiring payout increases spanning at least 25 consecutive years.

“A second reason I like SDY has to do with its individual characteristics, compared to other dividend funds, as opposed to macroeconomic forces. To start with, SDY is heavily exposed to the financials sector, with almost 23% of the fund weighted towards that sector. The reason I view this as a positive is that once rates do start to rise, it will provide a nice hedge for the fund, as financials such as banks and insurance companies tend to do better in a rising rate environment,” adds Seeking Alpha.


SPDR S&P Dividend ETF

Tom Lydon’s clients own shares of SDY, SCHD and NOBL.

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.