Exchange traded fund investors should consider the importance of dividend growth investing and incorporate a dividend growth strategy into their portfolios.
In the recent webcast, Dividend Growth Opportunities: Identifying Growth-At-A-Discount, Thomas J. Huber, portfolio manager at T. Rowe Price, explained that their T. Rowe Price Dividend Growth strategy seeks to capture attractive durable growth characteristics, such as proven earnings growth, profitability, strong balance sheets, excess free cash flow, earnings stability, and proven sales growth.
The Dividend Growth strategy can also provide another layer of diversification from traditional equity market exposure. Specifically, the dividend growth strategy is overweight with sectors like industrials, health care, and financials when compared to the S&P 500. On the other hand, the strategy is underweight in communication services, technology, and consumer discretionary sectors when compared to the benchmark. This may help the dividend strategy avoid some of the pricier segments of the market such as the growth-centric technology and consumer discretionary categories.
Huber also argued that the Dividend Growth Fund may provide access to structural growth trends that investors might more commonly expect in a high growth strategy, and it has historically done so with lower volatility and a greater focus on valuation. For instance, the dividend growth strategy offers access to structural growth trends like health innovation, renewable energy, electric vehicles, cloud computing, and digital payments.
Looking ahead, Huber believed that dividends will likely matter more as valuations imply tepid forward returns. As real interest rates move higher, long-dated cash flows will likely have lower present valuations. Meanwhile, it is still important to emphasize quality and durability as the pace of innovation continues.
Huber contented that dividend growth stocks could even be a hedge against an elevated inflationary environment. Dividend growth stocks may provide a hedge against inflation by generating a rising income stream in addition to the potential for capital appreciation. The impact of inflation is offset at the company level given the pricing power enjoyed by many of the companies owned in the portfolio.
Dividend growth stocks also provide a more stable or steady market exposure over time, according to Huber. The strategy mitigated downside risk and also provided strong participation in the upside over time. T. Rowe Price’s focus on quality companies with durable dividend growth has produced strong long-term cumulative performance.
Chris Murphy, the senior ETF specialist at T. Rowe Price, highlighted the growth of actively managed strategies in the ETF space to help investors better adapt to shifting opportunities in the market, especially in the dividend growth category. There are currently $300 billion in dividend-related ETFs, and the dividend ETFs category is now the third-largest smart beta sub-category.
To help investors better target dividend growth names, Murphy highlighted the actively managed T. Rowe Price Dividend Growth ETF (TDVG), which seeks dividend income and long-term capital growth by investing the majority of its assets in the common stocks of dividend-paying companies expected to increase their dividends over time.
Using an active management strategy driven by fundamental analysis, TDVG’s manager seeks stocks that aren’t all about yield and yield alone. Staying power is what the fund looks out for — names that can sustain their dividends over time while also having solid fundamentals.
The portfolio typically holds between 100 to 125 dividend‑paying stocks selected through analysis based on fundamentals such as the potential for generating excess cash flow, the potential trajectory of the company’s financial condition, and the quality of the stock’s management. The portfolio maintains a relatively broad set of equities across industries to help manage position sizes and control the risk profile.
Financial advisors who are interested in learning more about dividend growth strategies can watch the webcast here on demand.