The Federal Reserve boosted interest rates for the first time this year earlier in December. Given the strengthened growth outlook, some are anticipating the Federal Reserve to hike interest rates several times in 2017 to keep the economy from overheating.
However, a series of interest rate hikes should not be viewed as an indictment of dividend stocks and exchange traded funds. Some dividend ETFs can help investors endure those shocks, including new ETFs such as the Fidelity Core Dividend ETF (NYSEArca: FDVV), which debuted in September.
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 FDVV. 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.
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.
FDVV tracks the Fidelity Core Dividend Index, which “is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends.”
“Over the past couple of years, the energy sector has been home to more negative dividend action than any other group in the S&P 500. However, this Fidelity ETF has identified some of the safer dividend payers from the energy patch, as highlighted by FDVV’s 18% weight to energy stocks, the largest sector weight for this Fidelity ETF,” according to InvestorPlace.
The new ETF allocates more than half its weight to consumer discretionary, energy and financial services stocks, a sector lineup that could help FDVV in the face of higher interest rates. At 12.1%, technology is the other sector that commands a double-digit weight in FDVV.
For more information on dividend stocks, visit our dividend ETFs category.