While the U.S. isn’t heading toward a recession, growth will likely remain muted over the near term. Consequently, investors may turn to exchange traded fund strategies that target high-quality names, such as the group of consistent dividend growers.
On the recent webcast, Dividend Growers: High Quality Companies for a Low Growth Environment, Sam Stovall, Managing Director and U.S. Equity Strategist at S&P Global Market Intelligence, outlines a so-called Wall of Worry that is weighing on investment sentiment, including an aging bull market, an earnings recession, a Federal Reserve rate hike, volatility in the equities market, depressed oil prices, lone-wolf terror attacks, an upcoming U.S. presidential election and a post-Brexit environment. Nevertheless, the equities may have more room to run.
“Stocks can still climb, provided EPS continues to recover and inflation remains subdued,” Stovall said.
Given all the potential hurdles, Stovall anticipates seasonal price softness and volatility ahead in the third quarter. The strategist also pointed out that the third quarter has been a seasonally weak period for the equities market. Looking at the average S&P 500 sector price performance by quarters since 1990, the third quarter registered an average -0.7% return, with only the consumer staples, health care and utilities sectors turning out a positive return.
Consequently, during periods of elevated uncertainty but continued growth, investors may seek out more sturdy names.
“Investors tend to favor stocks with above-average consistencies of raising EPS and dividends during challenging times,” Stovall added.
Simeon Hyman, Head of Investment Strategy at ProShares, pointed to dividend growth ETF strategies as a way to target a group of high-quality companies.
In a survey of advisors on the webcast, 74% of respondents signaled they were interested in increasing their allocations toward dividend growth strategies.
“Quality and growth are the key,” Hyman said. “Companies that grew their dividends outperformed companies that didn’t. Companies that consistently grow their dividends tend to be high-quality with strong growth potential. These companies have been able to withstand repeated periods of market turmoil and still deliver strong returns with lower volatility.”
For instance, the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) follows the S&P Dividend Aristocrats Index, which is comprised of S&P 500 companies that have increased their dividends for at least 25 consecutive years. These dividend growers also exhibit common traits of high quality companies, such as a history of profit and growth, strong fundamentals, stable earnings, commitment to shareholders and a sound management team.