After a multi-year rally, the bull market is growing long in the tooth and beginning to slow down, but stocks can still slowly push higher. In a slow growth environment, investors should consider dividend exchange traded funds that can pay you along the way.
“All in all, I see a market that is supported by slightly better fundamentals but is held back by structural forces,” Jurrien Timmer, Director of Global Macro at Fidelity Global Asset Allocation Division, said in a research note. “My sense is that the new highs are justified, but that stocks will only grind higher for now, as opposed to an explosive move to the upside.”
U.S. markets have slowed down and have been stuck in sideways trading in recent weeks. Looking ahead, we may expect more of the same as slow growth and low inflation will continue to weigh on the economy.
[related_stories]The U.S. economy continues to plug along as full unemployment and robust consumption maintains forward momentum. However, an aging population, excessive debt and stagnant productivity growth have muted any upside gains. Consequently, nominal U.S. gross domestic product is moving along at a 2% to 3% pace while both real GDP and inflation are rising at an annualized 1% to 2% rate.
Moreover, the U.S. economy is strong enough to the point that the Federal Reserve may tighten its monetary policy but slow enough that the Fed may refrain from overtightening.
“In this regime, interest rates could stay low while earnings growth remains sluggish,” Timmer added. “This combination suggests that price-to-earnings (P/E) multiples will stay in the high teens, where they have been for some time. This is a regime in which the stock market may grind higher (with the occasional downside shock), but not much more than that.”
Consequently, in this slow growth environment, investors may squeeze out greater returns through quality firms that continue to payout dividends. For instance, Fidelity will be launching the Fidelity Dividend ETF for Rising Rates (FDRR). FDRR will track large- and mid-cap dividend-paying companies expected to continue to pay and grow dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields. Underlying stocks can include those with historically high dividend yields, low dividend payout ratios, high dividend growth, and a positive correlation of returns to rising 10-year U.S. Treasury bond yields.
SEE MORE: Fidelity Joins Smart Beta ETF Marathon
Investors also have a number of high-quality dividend-paying stock ETFs to choose from. 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 2.79% 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 1.79% 12-month yield.
For more information on dividend-paying stocks, visit our dividend ETFs category.