At a time of rampant dividend cutting, ETFs with quality growth traits, such as the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL), are standing out.
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.
While some NOBL components may not raise payouts this year, likely leading to a smaller roster for the fund down the road, the ETF remains home to a slew of durable dividend payers with the ability to grow payouts this year. Some already have, but that’s not the only advantage in NOBL’s strategy. NOBL helps investors avoid high-yield names and potential dividend traps.
“Simply because a company pays a high dividend (whether the absolute amount or relative to its price) doesn’t always make it a wise investment,” said S&P Dow Jones Indices in a recent note. “After all, a company paying too much in dividends may be left with little to no reserves in times of market turbulence; as a result, its dividends may be at higher risk for cancellation. Also, a high dividend yield may simply be a result of a decline in the company’s stock price, all else equal. These scenarios are often referred to as being ‘dividend traps,’ and in order to avoid these traps, it is important to incorporate quality screens.”
Inside the Importance of Aristocracy
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.
“The S&P Dividend Aristocrats Indices are well known for their stringent quality screen which is the hallmark of their methodology,” according to S&P Dow Jones. “This family focuses on stable dividend growth, requiring constituents to have consistently increased dividends every year for a certain period of time that varies by region.”
Other ProShares ETFs backed by dividend aristocrats benchmarks include the ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL) and the ProShares S&P Technology Dividend Aristocrats ETF (TDV).
The mid-cap Dividend Aristocrats Index, though, only requires 15 consecutive years of increased dividends for inclusion. TDV, which debuted last November, follows the S&P Technology Dividend Aristocrats, which requires member firms to have payout increase streaks of at least seven years. Its 34 holdings are equally weighted, a strategy that helps reduce single-stock risk, but the fund is nonetheless exposed to some tech dividend payers with attractive traits.
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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.