In the world of exchange traded funds, names can be deceiving. On first glance, the Fidelity Dividend ETF for Rising Rates (FDRR) is one of them.
FDRR is designed to reflect the performance of stocks of large- and mid-capitalization, dividend-paying companies expected to pay and grow their dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields.
In plain English, FDRR implies it’s designed to thrive when interest rates rise. Investors are dealing with the exact opposite today, with interest rates residing at historic lows and poised to remain that way for some time.
Although the Federal Reserve is unlikely to raise borrowing costs anytime soon, FDRR is a relevant ETF for income investors by virtue of its 3.20% dividend yield.
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“Good news: That group represents just 10% of the FDRR roster. That’s important not just because interest rates are low, but also because the Federal Reserve is dictating dividend policy to the largest U.S. banks, in effect restraining payout growth,” reports InvestorPlace.
Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team convection in their businesses.
Dividends have added significantly to returns over time, contributing approximately 32% of the S&P 500’s total return since 1960. During the return-challenged 1970s, dividends made up nearly three-quarters of S&P 500 returns – while investors earned a cumulative total return of 77% from the S&P 500 in that decade, 60% of that 77% was from dividends.
Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
“Speaking of dividend growth, FDRR has that and Fidelity may want to consider a name change for this fund that more accurately reflects its benefits, not its dependence on monetary policy. The technology and healthcare sectors, two of this year’s best dividend growth groups, combine for 46% of FDRR’s weight,” according to InvestorPlace.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.