Most dividend-related strategies select companies based on past or historical trends. Instead, investors may consider a forward looking dividend exchange traded fund to access stocks that are more likely to raise dividends ahead.
“Looking at alternatives?” Eric Ervin, President and CEO of Reality Shares, asked ETF Trends. “Reality Shares has a model which looks at companies based on their ability to grow dividends in the future, not based on their past dividend growth.”
Specifically, Reality Shares has recently brought out a suite of ETFs that focus on U.S. companies expected to raise dividends ahead, including the Reality Shares DIVCON Leaders Dividend ETF (BATS: LEAD), Reality Shares DIVCON Dividend Defender ETF (BATS: DFND) and Reality Shares DIVCON Dividend Guard ETF (BATS: GARD).
The DIVCON suite includes a “fund family of ETFs invested in the dividend growth of the broad market, and also those stocks most likely to increase their dividends while avoiding (or sometimes capitalizing on) those stocks more likely to cut their dividends,” according to a Reality Shares research note.
The group of DIVCON ETFs is not your traditional dividend strategy. For instance LEAD will try to reflect the performance of the Reality Shares DIVCON Leaders Dividend Index, which is comprised of high-quality large-cap U.S. companies with the highest probability of increasing dividends within a year, based on Reality Shares’ proprietary DIVCON dividend health scoring system.
SEE MORE: A Different Type of Dividend Growth ETF
In the 15 year period between January 2000 and December 2015, 97% of companies selected through the DIVCON scoring methodology has increased dividends. Year-to-date, 55% of LEAD’s holdings raised dividends with no cuts, whereas 36% of S&P 500 companies have raised dividends with 2.9% cutting dividends.
[related_stories]Moreover, Ervin pointed out that the DIVCON indexing methodology has outperformed other popular dividend growth strategies. Specifically, the Reality Shares DIVCON Leaders Dividend Index has generated a 9.4% 10-year annualized return, compared to the 8.0% return of the NASDAQ U.S. Dividend Achievers Select Index and 7.7% for the S&P 500. The Nasdaq U.S. dividend Achievers Select Index is the underlying benchmark for the popular the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), which tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years.
Additionally, DFND takes the long position in the dividend leaders while shorting the dividend laggards in a kind of 75/25, long/short strategy to help provide greater stability. Meanwhile, GARD goes long dividend leaders and includes a dynamic hedge on the dividend laggards to diminish the negative effects of potential downturns.
The underlying index also employs a type of smart-beta strategy, focusing on seven quality factors including earnings, cash flow, dividend history, buybacks, growth, analyst forecasts and ratings to predict future dividend growth.
SEE MORE: A Forward Looking Dividend ETF Strategy
The DIVCON dividend scoring system is also a forward looking mechanism, as opposed to other dividend index funds that target company stocks based on trailing yields.
“The power of the DIVCON model is the ability to distinguish higher quality companies from lower quality companies,” according to Reality Shares.
For more information on dividend stocks, visit our dividend ETFs category.