Higher interest rates can weigh on some high-yield, income-generating assets, explaining in part why some high dividend strategies have lagged the broader market this year. While high yields seduce, dividend growth is an integral part of the income equation for investors and that theme is accessible via an array of exchange traded funds.
The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) is the largest dividend exchange traded fund trading in the U.S. In addition to its low fee, one of the lowest among U.S. dividend ETFs, investors love VIG for its dividend consistency.
VIG targets U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years. Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
“Dividend growth is really more of a quality strategy than it is an income strategy,” said Morningstar in a recent note. “If you look at a lot of these dividend growth strategies, their yields aren’t that much higher than the market; in some cases, they are not any higher than the market. These are strategies that tend to look for stocks that have a consistent history of growing their dividends. And if you think about the types of companies that can do that, these tend to be very profitable companies that are less sensitive to the business cycle than most.”