Dividend growing companies have historically outperformed with lower volatility.
Investors can gain exposure to this group of market through an alternative dividend-themed exchange traded fund strategy.
On the recent webcast (available on-demand), ETF Bond Alternative with No Rate Risk, Eric Ervin, President and CEO of Reality Shares, pointed out that investors are currently in a challenging market environment, with historically low interest rates in bonds, uncertainty in alternative strategies and heightened market volatility.
However, investors can potentially enhance returns by focusing on dividend growers. S&P 500 dividends have increased 40 of 43 years since 1973, and dividends accounted for over 50% of total equity returns since 1930.
By isolating dividend growth as a fixed income replacement, investors can capture capital appreciation while being exposed to low correlation and low drawdowns across a variety of market environments, Ervin said.
“We offer a range of ETFs pinpointing and capitalizing on the benefits of dividend growth and investment in the stocks most likely to increase their dividends while avoiding those more likely to cut their dividends,” Ervin said.
[related_stories]To tap into the benefits of dividend growers, investors may consider the Reality Shares DIVS ETF (NYSEArca: DIVY), which tires to provide exposure to the growth rate of expected dividends and looks to deliver long-term capital appreciation rather than income and yield through options contracts and dividend swaps.
“Institutional investors have been investing in dividend growth for more than 15 years, but DIVY is the fist isolated dividend growth strategy offered in an easily tradable ETF,” Ervin added.
Ervin also argued that the dividend swaps prices do not reflect future growth expectations, which may leave a potentially untapped opportunity for investors. Long-term S&P 500 dividend growth has averaged 6.4% per year, but the dividend swap market has only priced in a 2.2% annual growth rate for the next seven years.
Investors who are wary of the negative effects of rising interest rates may also find that the dividend strategy may continue to perform in the environment ahead. Dividends have historically increased during periods of both rising and falling interest rates, showing negative correlation to bonds when rates rise and positive correlation to bonds when rates fall, which suggest that dividend growth may be a suitable bond alternative ahead.
“DIVY is designed to perform throughout virtually any market environment,” Ervin added. “Because it was designed to have a lower volatility than the S&P 500 while exhibiting higher returns than bonds, DIVY serves as a potentially effective replacement for part of your bond portfolio allocation.”
Investors should consider bond alternatives in the environment ahead, especially after a thirty-year bond market rally that has pushed yields toward historically lows, leaving investors exposed to greater risks. Jay Batcha, Founder and Chief Investment Officer of Optimal Capital, warned that the traditional 60/40 equity/fixed-income portfolio split is now a return reducer that magnifies risk.
In a survey of financial advisors on the webcast, 53% of respondents revealed that they were interested in liquid alternative strategies as a way to diversify their portfolios, but 33% showed some interest but required more research, which suggests that the liquid alts ETF category will need to push greater education to spread investor awareness.
Financial advisors who are interested in learning more about the dividend strategy can watch the webcast here on demand.