Dividend stock exchange traded funds (ETFs) have been among the better performing assets this year as investors steered toward value and conservative bets amidst rising uncertainty, and the dividend trade may still have legs.
‘We don’t see strong demand for dividend stocks dissipating anytime soon but suggest focusing on dividend growers,” Richard Turnill, Global Chief Investment Strategist for BlackRock, said in a research note.
U.S. dividend stocks have outperformed the S&P 500 over the past year as ultra-low bond yields and the ongoing low-rate environment pushed investors toward alternative income sources. Year-to-date, dividend-focused exchange traded products have attracted $7.4 billion, or seven times more than the 2015 total.
Even after the outperformance, Turnill argued that dividend growers are still attractively priced at 13.4 times forward earnings. Moreover, quality stocks that consistently grow their dividend streams also tend to be more resilient in more volatile markets, and conditions are looking rockier ahead.
“They have outperformed the broader market during high-volatility periods, our research shows,” Turnill said. “We see higher volatility ahead, given the risk of a British exit from the European Union, elevated U.S. valuations and the potential for a Fed rate increase in 2016.”
While high-yield dividend stocks have outperformed within the category, BlackRock analysis shows that high-dividend payers are vulnerable to higher rates. In comparison, dividend growers tend to perform well when the Federal Reserve gradually raises rates.
“They tend to have more rate-resilient characteristics, such as strong balance sheets, and benefits from a growing economy,” Turnill said.[related_stories]
ETF investors can also target U.S. dividend growers through a number of options. For instance, the iShares Core Dividend Growth ETF (NYSEArca: DGRO) specifically targets companies that pay a qualified dividend, must have at least five years of uninterrupted annual dividend growth and their earnings payout ratio must be less than 75%. DGRO has a 2.35% 12-month yield.
Alternatively, 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 2.16% 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 2.90% 12-month yield. The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion and shows a 2.39% 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 1.89% 12-month yield.
Investors can also take the dividend growth theme to overseas markets with something like the recently launched iShares International Dividend Growth ETF (BATS: IGRO).
“We see attractive dividend-growth opportunities in global pharmaceuticals, international telecoms, emerging market (EM) infrastructure and selected global information technology companies,” Turnill added.
For more information on dividend stocks, visit our dividend ETFs category.