While piddly yields on broader U.S. equity benchmarks and Treasuries make high dividend strategies enticing, dividend growth stocks and the related ETFs continue to look compelling, too. Just look at the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL), which is higher by nearly 17% year-to-date.
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.
Yes, dividend ETFs with yields in 3%, 4% or higher range are interesting at a time when the S&P 500 yields less than 2%. NOBL also yields around 2%, but there are factors investors need to consider before racing off to high-yield strategies.
Growth Matters For Long-Term Investors
“Dividend income funds, on average, had higher yields and payout ratios, but their dividends grew at a slower rate than the other two groups,” said Morningstar in a recent note. “They also tended to have a more pronounced value tilt. On average, their holdings traded at lower price/book ratios than the other groups, and they were less profitable, as measured by return on invested capital.”
For long-term investors, particularly those with a time frame that can indulge reinvesting dividends, payout growth can have a substantial, positive impact on total returns, underscoring the point that dividend growth matters.
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.
“Dividend growth funds provided lower yields than the dividend income group, but they focused on companies with stronger fundamentals and dividend-growth rates than the other two,” according to Morningstar. “Dividend growth funds, on average, tended to hold more-profitable companies. They had a higher fraction of their portfolios dedicated to firms with narrow and wide Morningstar Economic Moat Ratings (an indication of their preference for stocks with durable competitive advantages) than those in the dividend income and dividend growth-income groups.”
Over the past 12 months, NOBL is beating the S&P 500 by 400 basis points.
For more on core investing strategies, visit our Core ETF Channel.