Global dividend growth slowed in the third quarter and with the Federal Reserve poised to raise interest rates for the first time in 2016 later this month, some investors could be skittish about dividend stocks and exchange traded funds.
Those scenarios remind income investors that being selective is key when evaluating dividend ETFs. Stocks with steady yields reassure investors of a company’s strong financial health.
Additionally, dividend-paying 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.
Quality, dividend-paying stocks and exchange traded funds have been among the best performers this year as investors turned to a relatively undervalued segment of the market following the sell-off in growth stocks. The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) remains a solid idea for dividend investors in 2017.
VIG, the largest dividend-related ETF on the market, tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years. Investors may also consider consistent dividend growers as a way to gain exposure to this group of quality companies as dividend growers and high quality stocks share a number of similar characteristics.
“Vanguard Dividend Appreciation’s yield wouldn’t even impress a bond investor right now; at 2.1%, it’s only basis points better than the S&P 500. But the important thing to remember about VIG or any dividend growth investment is yield on cost. The idea is that over time, as the dividend payments of VIG’s holdings go up, so will VIG’s overall payments, and thus the yield on your original purchase,” reports Forbes.
VIG could also be useful if inflation rises. 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, such as VIG. 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.
“Let’s say you bought into VIG at the start of 2007 at around $54. Based on the 72.58 cents it paid out, you enjoyed a yield of just 1.3% that year. However, in 2015, you would be sitting on a yield of well more than double that – 3.4% — based on its $1.85 in annual dividends. (Not to mention about 56% in capital gains since then),” adds Forbes.
For more information on dividend stocks, visit our dividend ETFs category.