Investors often believe that dividend stocks trade at premiums to broader equity benchmarks due to the combination of defensive, quality traits and above-average yields. And it would be reasonable to assume that dividend growth stocks, such as those found in the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL), would be somewhat pricey due to the quality characteristics found on dividend growers.
However, some market observers are saying dividend stocks aren’t as expensive as investors may think. A tinge of value could benefit NOBL, which is up more than 20% this year and has been luring investors looking for income and reduced volatility.
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.
The run-up in dividend stocks “hasn’t made dividend-paying equities on the whole particularly expensive, according to an analysis by Ed Clissold, chief U.S. strategist at Ned Davis Research,” reports Chris Matthews for MarketWatch.
Some sectors are known for dividends, including consumer staples and industrials. In the S&P 500, an average of 95% of the constituents in those sectors pay dividends and those groups are the two largest sector weights in NOBL, combining for over 45% of the fund’s weight.
Improving earnings growth could bolster dividend growth in 2020. 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.
There are some concerns about stretched valuations in the staples sectors, NOBL’s largest sector at allocation at nearly 23%. However, those concerns are mitigated by the fund’s combined weight of more than 23% to financial services and healthcare names, two sectors widely viewed as value plays.
Additionally, the more defensive sectors rise, the lower their dividend fields drop, meaning high premiums relative to broader benchmarks may not be warranted.
“One reason dividend-paying stocks haven’t become more expensive relative to the rest of the market is that the rally in defensive stocks has led their dividend yields to fall as their stock prices rise,” according to MarketWatch.
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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.