Target The “Sweet Spot” of Income and Growth With TDVG

With markets facing high volatility and many analysts foreseeing a recession in our midst, many investors see dividend-paying stocks as a potential haven. After all, when the broader market is down or flat, dividend payments can be a crucial source of return and serve as a good shock absorber.

A white paper issued by T. Rowe Price argues that “dividend growth stocks, which historically have run neither too cold during downturns nor too hot in speculative markets, are well positioned in the current environment and beyond.”

“Dividend growth stocks have held up relatively well in the first half of the year,” wrote Tom Huber, portfolio manager of the T. Rowe Price Dividend Growth ETF (TDVG). “We believe thoughtful and nuanced investing in high-quality dividend growers can be an all-weather equity strategy. Market history shows that these kinds of stocks have tended to hold up better in the bad times while capturing a good portion of the upside in all but the most speculative markets.”

While higher-yielding large-cap stocks have often been seen as a port in the storm, stocks in the highest dividend-yielding quintile of the Russell 1000 Index have exhibited greater volatility over time — and precisely when investor demand for safety was at its highest. This is because the index’s highest-yielding quintile now includes fewer defensive stocks and more cyclicals, which tend to exhibit greater sensitivity to economic conditions.

So, the stocks that T. Rowe targets typically sit at what the firm sees as “the sweet spot of income and growth investing,” according to the white paper. T. Rowe believes investing in companies with the potential for sustained dividend growth is a superior approach over purely seeking high dividend yields.

TDVG is an actively managed ETF that can own traditional dividend-growing stocks when index-based funds can’t or won’t because of their methodology. It seeks dividend income and long-term capital growth.

According to T. Rowe Price, the ETF puts an emphasis on stocks that are expected to have increasing dividends over time. When appropriate, the portfolio manager may also attempt to buy stocks when they are temporarily out of favor or undervalued by the market. Through TDVG, the firm gravitates toward high-quality businesses that should be durable enough to sustain a strong run of earnings, cash flow, and dividend growth. TDVG has an expense ratio of 0.5%.

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