ETF Trends
ETF Trends

Exchange traded funds with an emphasis on dividends have become increasingly popular. But all dividend ETFs are not created equal and some sport higher expense ratios that can erode yields and total returns.

Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.

Related: Best of Both Worlds With This Dividend ETF

One dividend ETF investors should take a closer look at is the PowerShares High Yield Equity Dividend Achievers Portfolio (NYSEArca: PEY). “PEY follows the Nasdaq U.S. Dividend Achievers Index, which selects companies based on a combination of dividend growth and yield. This ETF holds 50 companies with over 42% of the fund’s combined weight allocated to the utilities and energy sectors,” according to InvestorPlace.

Dividend growers provide an aspect of quality and growth since these firms have a long track record of raising dividends.

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Stocks with steady dividend yields reassure investors of a company’s strong financial health. Additionally, dividend-payin stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends.

Related: Low U.S. Interest Rates Boost International Dividend ETFs

“Referring again to the Fed, if they expect yields to be low for the foreseeable future it might be a good idea to look for well-constructed funds, like Invesco’s PEY, which holds best in class, proven, established, well capitalized companies which can ride out a few years of slower growth,” according to a Seeking Alpha analysis of PEY.

PEY allocates 24.3% of its weight to utilities stocks. Most investors view utilities as a reliable, income-generating asset that exhibit some bond-like characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields.

Utilities traditionally trade at richer multiples relative to the broader market due to the sector’s defensive traits, but consumer staples are actually more expensive at the moment.

For more news and strategy on the Dividend ETF market, visit our Dividends category.

PowerShares High Yield Equity Dividend Achievers Portfolio

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.