With equity market volatility rising on the back of trade tensions between the U.S. and China, some investors are mulling defensive strategies. Some of the related exchange traded funds can come with income kickers, including the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL).
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.
NOBL has a dividend yield of 2.13%. Over the long-term, dividend strategies top the S&P 500 on a total return and an absolute basis. Reinvesting dividends is also a vital part of the equation. For the three years ended Jan. 29, 2019, including dividends reinvested, NOBL returned 44.30 percent compared to 35.50% without dividend reinvestment.
“While history may not be a good predictor of future returns, company dividend policies are sacred,” according to Seeking Alpha. “A company that adopts a certain dividend policy and then deviates from that policy is likely to alienate many of the dividend-seeking investors that favor the stock.”
Dividend Growth Advantages
Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Quality dividend ETFs, such as NOBL, try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
NOBL’s underlying index “has comfortably outperformed the S&P 500 Index consistently, which has helped NOBL gain traction among other dividend-focused ETFs in the market,” according to Seeking Alpha. “The outperformance of the underlying index in comparison with the S&P 500 Index has also come at a lower volatility as well, and this attractive risk-return profile has been embraced by many investors over the last decade.”
Investors have added nearly $175 million to NOBL in the second quarter.
For more on core investing strategies, please visit our Core ETF Channel.