Investors who are seeking a solid core position and are looking to generate a little extra cash on the side may turn to a quality dividend exchange traded fund strategy that specifically targets companies with a history of growing yields.
The ProShares S&P 500 Aristocrats ETF (BATS: NOBL) is CFRA’s Focus ETF of February, Todd Rosenbluth, Director of ETF Research at CFRA, said in a research note, citing NOBL as a “top ranked offering based on our holdings-level and ETF-level analysis. The ETF is viewed favorably based on a variety of our risk considerations and costs factors.”
The ProShares S&P 500 Aristocrats ETF tries to reflect the performance of the S&P 500 Dividend Aristocrats Index, a customized version of the broader S&P 500 benchmark. Specifically, the underlying index only includes S&P 500 companies that have raised their dividends for 25 or more years.
“To us, an ETF based on companies with long-term record of increasingly returning money to shareholders limits the risk profile of the portfolio,” Rosenbluth said. “While rising rates may make high dividend yielding stocks less attractive, we think dividend growers will remain in favor as their managements have strong records through various business cycles.”
The underlying index is reconstituted on an annual basis to include those that have either reached a 25-year dividend growth streak or joined the S&P 500 with the 25-year milestone in hand. Meanwhile, stocks may be removed for failing to meet the criteria.
S&P Dow Jones Indices recently announced the Federal Realty Trust (NYSE: FRT) joined the S&P 500 in 2016 and General Dynamics (NYSE: GD) recently joined the esteemed group of 25-year dividend growers. Both FRT and GD will join the S&P 500 Dividend Aristocrats Index on January 31.
On the other hand, HCP Inc (NYSE: HCP) will be cut after a recent dividend reduction following its spin-off of the now known Quality Care Properties.
Current top holdings include prominent names like Nucor 2.4%, Automatic Data Processing 2.3%, Chevron 2.3%, Sysco Corp 2.3% and AT&T 2.2%. Holdings are also more or less equally weighted and rebalanced on a quarterly basis.
Due to its indexing methodology, NOBL has a much different sector profile than the benchmark S&P 500. The dividend growth ETF overweights consumer staples 25% and industrials 16%, whereas the S&P 500 leans on information technology 21% and financials 15%.
“CFRA thinks amid market uncertainty related to the aging bull market and a new President, an ETF that can provide both potential downside protection as well as holding some attractively valued stocks is worthy of attention,” Rosenbluth added. “With additional favorable low costs, NOBL is a strong ETF for consideration.”
For more information on dividend stocks, visit our dividend ETFs category.