Many investors have looked to dividend stocks and exchange traded funds to generate some extra income, but these strategies are not all created equal and varying styles may perform differently during the rising interest rate environment we are now facing.
Dividend ETFs usually fall under two categories: dividend growers and high-yield dividends. These two types of fund methodologies are constructed differently and are used to accomplish different objectives.
High-yield dividend style, like the name suggests, focuses on stocks with high income potential, but they come with their own set of risks.
“Investors seeking a greater-than-average income may choose high dividend yield strategies,” according to a ProShares note. “But these strategies tend to have significant weightings in sectors that are highly sensitive to interest rate movements, thus introducing interest rate risk into the equity allocation.”
Dividend growth stocks, though, hone in on those that consistently grow their dividends over time, which may provide a sense of quality for investors.