Traditional approaches to dividend investments either target a high dividend yield or a history of dividends, yet both methods may be short-sighted in isolation. Alternatively, investors can consider a dividend exchange traded fund strategy that targets both strong fundamentals and dividend growth over time.
Specifically, the SmartETFs Dividend Builder ETF (NYSE Arca: DIVS) is an actively managed dividend growth strategy that seeks dividend-paying companies that have provided an inflation-adjusted cash flow return on investment of at least 10% in each of the last 10 years. The ETF invests in approximately 35 dividend-paying companies globally.
“DIVS takes a thoughtful approach. Many dividend growth ETFs focus on the dividend history. We prefer to look at the economic fundamentals of each company,” according to SmartETFs.
SmartETFs argues that dividend strategies focusing on high dividends and a history of dividends are flawed since they often fail to identify which factors are generating those dividends.
“DIVS invests with a quality bias. We seek companies that have growing dividends, persistently high rates of return on capital, and low levels of debt,” adds SmartETFs.
When building the DIVS portfolio, portfolio managers perform a detailed review to seek persistent cash flow, or companies that have achieved a real cash flow on investment of at least 10% on capital for each of the last 10 years. Companies have sound balance sheets or low levels of debt. Additionally, the portfolio managers target value, purchasing shares at a time when target companies are trading at the low end of their peers, low end of their history, and low end of their industry.
“All of this is meant to produce a portfolio of dividend paying companies that has the potential to be able to grow their dividends consistently over time,” concludes SmartETFs.
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