Uncovering the Value in Dividend Grower ETFs | ETF Trends

While investors wait on the value factor to bounce back, dividend growth strategies, including the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL), could be the better alternative as some market observers see value in dividend growth stocks.

NOBL tracks the S&P 500 Dividend Aristocrats Index, a benchmark that only includes companies that have boosted dividends for 25 consecutive years. Dividend growth strategies, including NOBL, often feature exposure to the quality factor and a recent analysis of NOBL’s underlying index confirms as much.

“Dividend-growth stocks look cheap, according to Goldman Sachs,” reports Daren Fonda for Barron’s. “Large-cap stocks with expected dividend growth of 10% a year through 2020 trade at 12 times earnings, compared with a P/E ratio of 17 for the S&P 500, which is expected to have dividend growth of 6% on an annualized basis. Stocks in Goldman’s dividend-growth basket yield an average 3.5%, well above the market’s 2% yield.”

A Quality Idea

While dividend growth can be seen as a standalone factor, it is also a sign of the quality factor. The quality factor is a point of emphasis for a growing number of strategic beta exchange traded funds. Though there has been debate surrounding defining quality as it pertains to factor-based investing, quality companies and dividend-paying stocks often go hand-in-hand because those dividends are seen as signs of stable earnings and thoughtful management.

“Dividend growth is considered a stock ‘factor or attribute,” according to Barron’s. “It can be a proxy for quality since companies with dividend growth tend to have relatively high returns on equity and consistent cash flows. Indeed, in Goldman’s framework, dividend-growth stocks have returns on equity of 24%, well above the market average of 19%.”

Dividend ETFs, both dividend growth funds like NOBL or high-yield ETFs, are trailing the S&P 500 this year. However, NOBL is up 13.80% this year, putting the ETF slightly ahead of the high dividend Dow Jones U.S. Select Dividend Index.

“Granted, there is a distinction between high-yield and dividend growth. High-yield sectors such as utilities lack much revenue growth, limiting gains in their shares and their ability to increase dividends. Companies with more growth can hike their dividends at a faster clip, and they offer more potential for price gains,” according to Barron’s.

NOBL allocates just 3.48% of its weight to rate-sensitive real estate and utilities stocks. The fund devotes over 45% of its weight to the industrial and consumer staples sectors.

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