The Federal Reserve meets this week and markets are pricing an all but guaranteed interest rate cut by the central bank, a move that could further propel income-generating asset classes, including dividend stocks and exchange traded funds.
A rate could benefit the already solid 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.
“For dividend stocks, a cut in interest rates by the Federal Reserve should help a bit,” reports Lawrence Strauss for Barron’s. “That’s partly because—in theory at least—dividend yields become more attractive versus bonds and other income-generating assets in a lower-rate environment.”
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.
Growth Over Yield
Historically, lower interest rates benefit higher-yielding assets and sectors. For its part, NOBL is a dividend growth play, but that does not diminish the fund’s potential potency against the backdrop of lower interest rates.
Dividend-paying companies have also exhibited a long history of outperforming the markets. Since 1960, dividends have contributed approximately 33% of the S&P 500’s total return.
“Dating to the mid-1970s, the dividend-paying stocks in the S&P 500 outperformed the nonpayers by 5% on average one year after a Fed rate-cutting cycle began, according to Ed Clissold and Rob Anderson of Ned Davis Research,” reports Barron’s. “But the fastest-growing dividend stocks and those with the highest yields ended those 12-month stretches about even, they found.”
The dividend growth story has also consistently outperformed over time. Looking at the three-year rolling returns, the S&P 500 Dividends Aristocrats Index outperformed the S&P 500 111 of the 129 periods, or 88% of the period, from 2005 through 2018.
NOBL does an admirable job of mixing defensive and cyclical sectors. Consumer staples and industrial stocks combine for 45% of the fund’s weight. Financial services, materials and healthcare names combine for over 34% NOBL’s roster.
A slew of financial services companies recently announced higher dividends and buybacks. Those buybacks are happening at depressed valuations, potentially helping the sector boost earnings.
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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.