The ProShares S&P 500 Aristocrats ETF (CBOE: NOBL) is among the dividend ETFs that have held relatively well this year despite a challenging environment for S&P 500 payouts. Investors considering the ProShares ETF should expect some impact from the Federal Reserve.
NOBL tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers
Although inflation remains muted, there are inklings it could move higher, which would highlight tangible benefits with NOBL because dividend growth historically tops inflation.
“Today, following another crisis and subsequent monetary rescue, the inflation hawks are back, as is uncertainty around the path forward for inflation,” according to S&P Dow Jones Indices. “Despite massive stimulus and a spike to the money supply earlier this year, the 10-Year Breakeven Inflation Rate is right around where it was to start 2020 (1.72% on Aug. 26, 2020, versus 1.77% on Dec. 31, 2019), 30 bps below the Fed’s previous 2% long-term inflation target.”
Why It’s Important
Low bond yields are forcing fixed income investors to seek other avenues in order to satiate their appetites for yield. One of the options is dividends via equities, which puts forth the opportunity to consider dividend-focused exchange-traded funds (ETFs).
Importantly and highly relevant today, NOBL is not a high dividend strategy. When sorting by dividend yield: companies in the highest quintile of dividend yield – those whose ability to pay may become stretched in challenging markets – account for more than double the number of dividend cuts and eliminations versus those in the bottom quintile with more modest dividend yields
“If the Fed’s policies have the effect of suppressing yields across the fixed income markets even as inflation begins to rise, perhaps investors could be disposed to take a second look at the equity markets for reliable income,” notes S&P Dow Jones. “If they do, they might be wise to discern between companies that can maintain a steady stream of cash payouts to shareholders, and those that (perhaps due to a collapse in price) have a high dividend yield.”
Even if inflation doesn’t pick up over the near-term, NOBL is still relevant today owing to the Fed’s “lower for longer” policy.
“Though the future for inflation is uncertain, bond yields could be lower for longer even if inflation picks up. For investors seeking income, perhaps it is time to give the equity markets a second look and to let the Fed power your entry into the Aristocracy,” according to S&P Dow Jones.
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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.
