Investors looking to grow dividend income over time can look to Victory Capital’s newly launched VictoryShares Dividend Accelerator ETF (VSDA), which began trading on Nasdaq today.
VSDA seeks to provide investment results that track the performance of the Nasdaq Victory Dividend Accelerator Index (NQVDIV), which Victory Capital developed in partnership with Nasdaq.
The Index uses fundamental criteria, including proven earnings stability, to select companies with the highest likelihood of consistently growing dividends year over year. It seeks to identify those companies early in their lifecycles and assemble them in a rules-based portfolio that emphasizes growing dividends per share.
The VictoryShares ETF platform is designed to provide investors with rules-based solutions that bridge the gap between the active and traditional passive elements of their portfolios. The expanded product line builds upon the success of the VictoryShares volatility-weighted ETFs, which have grown to more than $1.2 billion in AUM as of March 31, 2017.
ETF Trends spoke with Mannik Dhillon, President, VictoryShares and Solutions, to discuss the launch of VSDA.
Tell me about the VictoryShares Dividend Accelerator ETF (VSDA) and what it is designed to do?
With the overall VictoryShares platform, our goal is to help fill in our gap between what has been traditional passive for years and true active management. We come from a pedigree of active management at Victory and we feel there is a way to bring active edge into these rules based solutions. Where the dividend accelerator fits in is simply looking at what the demand has been in the marketplace, which is income. Clients are definitely in need of better income solutions. Dividend Accelerator isn’t focused on dividend yield per say like a high-dividend high-yield equity income product, which we call a “dividend payer”. This is a “dividend grower” product.
There are a number of products that have been investing in dividend growers, companies that have consistently year over year increased their dividends for some period of time. These ETFs vary from growing their dividends for 10 years or more, 20 years or more, 25 years or more etc. The Dividend Accelerator seeks to identify those companies earlier in their dividend growth lifecycle, so you can potentially benefit from more of that dividend growth performance.
We know that Dividend Growth companies may tend to do better over time for a couple of reasons. Their dividend is growing over time, making them more in-demand from an income perspective, but, also, they generally have fundamentals or financial criteria that allow them to be able to grow their dividend over time and that makes them potentially good investments.
Now why wait naively until year 10, or 15 or 20 to put them in your index, when you can identify them much sooner. The Dividend Accelerator ETF tracks the Nasdaq Victory Dividend Accelerator Index (NQVDIV), which includes in its universe those companies that have, at a minimum, grown their dividends for 5 years or more. You can’t stop there, right? When a company doesn’t grow or cuts its dividends, it can lead to capital loss for clients. The index uses a set of fundamental criteria to identify those companies which we believe are more likely to grow their dividends. And then, lastly, when you put them together, you weight them in a way that emphasizes overall growth of the dividend payment. Really, at the end of the day, that’s what we think clients want — to invest a certain dollar amount in a product that pays dividends and those dividends have the potential to continue to grow year over year and, at the same time, the underlying stocks have the potential for growth. That’s a win-win.
You mentioned that this ETF seeks to invest in companies that are Dividend Growers vs Dividend Payers. What’s the difference between the two?
Dividend growers and payers are both important in an income-orientated solution for a client. They behave differently. Dividend growers tend to perform with less volatility.
Dividend payers emphasize dividend yield, which is dividend over price. When you rebalance a portfolio, and you’re looking for just the highest yielders, you may be investing a stock whose yield is increasing only because its price is falling. Having an investment in growers is a good complement for that.
How does VSDA differ from other ETFs that invest in Dividend Growers?
VSDA invests in these dividend growth companies earlier. One interesting element that it brings is when you think about new emerging economies and sectors. Take technology companies, for example. A lot of technology companies are not so mature that they have been growing their dividends for 20 plus years. So traditional dividend grower products wouldn’t invest in them until a lot later. By including them earlier in their lifecycles – VSDA seeks companies that have at least grown their dividends for five years – and then looking at their fundamental criteria to determine their probability of being able to keep that up, you get a much different profile in this ETF from an industry/sector perspective.
That’s what we’re trying to educate clients on. Percentage yield is one thing, but the actual growth in dividend payments is another thing.
What’s the advantage to investors of investing in Dividend Growers early in their lifecycles?
Dividend growth has definitely been tied to performance of stocks. Companies that are able to grow dividends tend to do well over time, and this is well documented. If you can participate in that performance sooner by making a more intelligent decision about those companies that are going to be able to keep increasing dividends, you’ll potentially be better off from a total return perspective. It’s two-fold: can you diversify your exposure by investing in newer companies and economies and then also benefit from potential price appreciation for a longer time.
For example, if you simply wait for a company to grow their dividends for 20 years before you put them in your ETF or your index, does that mean it wasn’t a good company in year 17, 18, 19? No. You may have missed a lot of the price appreciation that often happens early on.
VSDA tracks the Nasdaq Victory Dividend Accelerator Index, which you developed in partnership with Nasdaq. How did you work with Nasdaq to develop the index?
It is a great working relationship. It allowed us to bring Victory’s investment edge, our intuitive and differentiated way of looking at stocks, and combine that with the very deep data and technological and index-based experience and resources within Nasdaq. We were able to synthesize an idea into a rules-based methodology using their expertise.
For more information on new fund products, visit our new ETFs category.