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.