Uncle Sam is doling out more than $2 trillion to help small businesses and large companies weather the COVID-19 storm, but his generosity comes with strings attached. For public companies borrowing under the Treasury Department’s $500 billion program, strings attached to those loans include abolishing buybacks and dividends.
Plenty of companies from an array of industries are tapping CARES Act funding, perhaps explaining one reason why S&P 500 dividend growth will decline if not turn negative this year. Investors can skirt the side effects of the CARES Act with the right dividend ETFs, including the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL).
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.
“Not all dividend-paying stocks are created equal. Generally, there are two broad categories of dividend paying stocks—dividend growers, and high dividend yielders,” said Kieran Kirwan, Director, Investment Strategy at ProShares,” in a recent note. “Historically, high-quality companies that have continuously grown their dividends have displayed durable business models, stable earnings, solid fundamentals, and strong histories of profit and growth.”
When Lower Is Better
NOBL has a distribution yield of 2.40%, which isn’t considered high and that’s important in this environment because, regardless of those CARES Act, plenty of high yielders are cutting or suspending dividends. Many offenders hail from the energy and real estate sectors. Energy is just 2.59% of NOBL’s weight and the fund has no real estate exposure.
“Regardless of which companies ultimately accept assistance from the stimulus bill, many analysts expect a wave of companies to cut, suspend, or eliminate their dividends simply as a means of preserving liquidity,” said Kirwan.
What is important is for investors to emphasize quality, particularly in this climate. Speaking of, Dow components Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG), two NOBL holdings, announced dividend hikes just this week. Add to that, none of the ETF’s 64 member firms have announced dividend cuts this year, though some may ultimately be expelled from the fund simply because they maintained not increased payouts.
“While much remains uncertain, the highest-quality companies have, however, proven their ability to grow their dividends over time. And they have demonstrated an ability to survive through a range of market environments, even raising dividends after previous recessions,” according to Kirwan.
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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.