Investors who are looking for ways to diversify should also consider the long-term potential of the Dividend Aristocrats or ETFs that focus on the dividend growth theme and how these strategies can fit into a well-rounded portfolio.
On the recent webcast, Dividend Aristocrats—Quality Strategies When Volatility Heats Up, Kieran Kirwan, Director of Investment Strategy, ProShares, warned of the variable nature of volatility and highlighted quality dividend growth strategies as a way to help a portfolio curb the wild moves.
The markets experienced heightened levels of volatility the past year, with many asset categories swinging back to double-digit gains this year after suffering through double-digit losses in 2018. Investors suffered through a spike of over 60 days with 1% or more daily moves in the S&P 500 over 2018, and in 2019, markets have already experienced over 30 days of 1% or more daily moves.
As the U.S. heads deeper into the late economic cycle, earnings growth is beginning to slow, with S&P 500 quarterly earnings contracting for the first time since 2016 during Q1 2019 and were on pace to register back-to-back quarterly contractions. The markets are no longer priced cheaply and are also not priced too expensively.
Given the near full valuations, bouts of volatility and weak earnings growth that pose challenges to equity investors, Kirwan argued that quality stocks present an opportunity to diversify a portfolio. Specifically, 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 conviction in their businesses.
“There are common traits that define high quality companies that grow their dividends. They tend to have long histories of profit and growth. They typically have strong fundamentals and stable earning streams. And their strength comes from the top, from management teams with conviction and a firm commitment to shareholders,” Kirwan explained.
Dividend-paying companies have exhibited a history of outperforming the markets. Since 1960, dividends have contributed approximately 33% of the S&P 500’s total return.
“Many factors contribute to equity returns, but dividends in particular have contributed significantly to returns over time,” Kirwan said.
For example, in the period between 1987 through 2018, dividend growers within the Russell 3000 generated an annualized 13.1% return with an annualized volatility of 14.3%. In comparison, dividend non-changers returned 9.4% with a 16.8% volatility, dividend non-payers returned 6.9% at 23.8% volatility, and dividend cutters saw a 5.8% return with 21.9% volatility.
“Companies that grew their dividends outperformed companies that didn’t. Companies that consistently grow their dividends tend to be high-quality, with strong growth potential. These companies have been able to withstand repeated periods of market turmoil and still deliver strong returns with lower volatility,” Kirwan said.
Corey Hoffstein, Co-Founder and Chief Investment Officer, Newfound Research, also emphasized that dividends matter a lot. For example, he pointed to Rob Arnott’s findings taken from Dividends and the Three Dwarfs, which showed that under a situation of no dividends spent, no taxes were taken and market returns were earned without fees or expenses, a $100 investment in 1802 would have generated $1.8 million in dividend yields alone.
To track this group of quality company stocks, investors can look to dividend growth strategies like the ProShares S&P 500 Aristocrats ETF (BATS: NOBL), which measures stocks with a long track record of dividend growth with companies increasing dividends for at least 25 consecutive years.
ProShares also offers the ProShares Russell 2000 Dividend Growers ETF (BATS: SMDV) and the ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS: REGL) for those seeking quality dividend growers in the small- and mid-cap categories, respectively. REGL tracks a Dividend Aristocrats Index. The mid-cap Dividend Aristocrats Index, though, only requires 15 consecutive years of increased dividends for inclusion. SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.
ProShares is also working on two more dividend growers ETFs to expand its dividend suite. The upcoming ProShares Russell U.S. Dividend Growers ETFs (TMDV) will track the Russell 3000 Dividend Elite Index, which has a minimum requirement of 35 consecutive years of dividend growth, and the ProShares S&P Technology Dividend Aristocrats ETF (TDV) will track the S&P Technology Dividend Aristocrats Index, which includes technology-related companies with a minimum of 7 years of dividend growth.
Investors can diversify into international markets while tracking similar dividend growth strategies. For instance, the ProShares MSCI EAFE Dividend Growers ETF (BATS: EFAD) tracks developed market Europe, Australasia and Far East companies that exhibit a minimum dividend increase streak of 10 years.
The ProShares MSCI Europe Dividend Growers ETF (BATS: EUDV) tracks the performance of the MSCI Europe Dividend Masters Index, which consists of at least 25 European companies that have consistently increased their dividends for at least 10 consecutive years. The ProShares MSCI Emerging Markets Dividend Growers ETF (BATS: EMDV) follows the MSCI Emerging Markets Dividend Masters Index, which targets MSCI Emerging Market components that have increased dividend payments each year for at least seven consecutive years.
Financial advisors who are interested in learning more about dividend growth strategies can watch the webcast here on demand.