Amid a spate of negative action to start 2020, advisors and investors are reasonably concerned about what the near-term outlook is payouts. Some ETFs, including the ProShares Russell U.S. Dividend Growers ETF (CBOE: TMDV), focus on elite dividend growers, helping investors avoid brushes with payout offenders.
The ProShares Russell U.S. Dividend Growers ETF is unique among dividend growth ETFs currently on the market. That new ETF tracks the Russell 3000 Dividend Elite Index, which requires member firms to have minimum dividend increase streaks of at least 35 years.
“The pandemic-driven shutdown of much of the global economy—and the uncertain path to recovery—are weighing on nearly every aspect of the investment landscape,” said ProShares in a recent note. “Of particular concern to many investors is the question of what will happen with dividends. It’s a fair question when you consider that dividends have contributed approximately 32% of the S&P 500’s total return since 1960.”
With its dividend increase streak mandate of 35 years, TMDV has the longest such streak among competing ETFs, confirming its quality leanings and utility in a rough market for dividend investors.
Dividends Are Still Important
Assuming the current market malaise gives way to an extended period of sub-par returns, dividends will take on increased importance, particularly for long-term investors.
“Paradoxically, if we are in for a period of muted equity returns—an environment where at least some companies’ dividends may be at risk—dividends may have increased importance,” according to ProShares. “During the return-challenged 1970s, dividends accounted for nearly three-quarters of S&P 500 returns. It wasn’t an entirely lost decade. Investors earned a cumulative total return of 77% from the S&P 500 in that decade. The catch, however, was that 60% of that 77% was from dividends.”
A total market domestic-focused product like TMDV can serve as the equity anchor of a well diversified portfolio.
TMDV’s index contains a minimum of 40 stocks, which are equally weighted as of each quarterly rebalance date rather than weighted by market capitalization. No single sector is allowed to compose more than 30% of the index’s weight.
“In addition to the economic risk to dividends, investors have also become understandably concerned regarding the current legislative risks to dividends,” said ProShares. “In the United States, the CARES Act stimulus bill specifies that companies receiving federal assistance will, among other restrictions, be prohibited from paying a dividend for a period of time. The key to keeping this legislative risk in perspective is to remember that only companies that receive federal assistance will be subject to these restrictions.”
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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.