Dividend stocks and exchange traded funds are back in style in a big way this year and while that’s certainly good news for investors seeking income and reduced volatility, investors still need to be selective when evaluating dividend ETFs.
An excellent avenue for doing just that is SmartETFs Dividend Builder ETF (DIVS). DIVS isn’t a run-of-the-mill dividend ETF. Rather, it’s actively managed and takes a global approach to identify quality dividend stocks. The latter point is relevant today because it’s not just domestic companies that deliver when it comes to payouts.
“High-dividend-paying stocks have been outpacing the overall stock market this year in the U.S., Europe, and Japan, except during July. Both the S&P 500 High Dividend Index and MSCI Europe High Dividend Index have delivered positive total returns for the year through the end of July, while the S&P 500 is down 13% and MSCI Europe Index is down 7% (as measured in euros),” noted Jeffrey Kleintop of Charles Schwab. “In Japan, the MSCI Japan High Dividend Index is up 13% this year compared with losses for the MSCI Japan Index (as measured in yen).”
DIVS allocates 53% of its weight to U.S. stocks with European dividend payers representing about 40% of the fund’s weight, confirming the sturdiness of dividend stocks across the pond could benefit DIVS investors.
Another advantage of DIVS is that by way of its focus on quality, it’s not heavily allocated to sectors that can be homes to potentially strained high-dividend fares.
“One of the risks of dividend investing is sector concentration,” added Kleintop. “Companies in the Utilities and Consumer Staples sectors tend to pay much higher dividends than companies in other sectors. Seeking high-dividend payers without considering sector allocation can result in a lack of diversification, potentially making a portfolio more vulnerable during periods of high volatility.”
Additionally, the quality focus offered by DIVS often means that the fund arrives at a value not always by intent. That’s important because a singular focus on cheap dividend stocks can lead investors to problems, such as cuts and suspensions. DIVS eschews that methodology.
“Those more vulnerable to a dividend cut have a high dividend payout ratio, low dividend-coverage ratio, low free-cash-flow-to-equity, and high net-debt-to-EBITDA. While the vast majority of high-dividend payers pass these tests, they are backward-looking assessments,” concluded Schwab’s Kleintop.
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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.