Dividends Are Growing, But Investors Need to Be Picky with ETFs

Dividends are delivering sturdy growth this year. In fact, it’s possible payouts will return to pre-coronavirus pandemic highs in the current quarter or at least get close to doing so.

On a related note, it’s not surprising that investors are flocking to dividend exchange traded funds with payouts growing and bond yields historically low. However, that’s also a reminder that investors embracing dividend ETFs should be selective. One way of accomplishing that is with the actively managed SmartETFs Dividend Builder ETF (DIVS).

“There are 143 U.S. dividend ETFs, with assets totaling over $281 billion. In addition to offering bigger payouts than average stock ETFs, these products offer investors more diversification than individual stocks and greater tax efficiency. Net inflows into the sector this year through July 31 were nearly $25 billion, Morningstar reports, compared with net outflows of $1.8 billion in the year-earlier period,” reports Lori Ioannou for the Wall Street Journal.

DIVS is a relevant dividend ETF consideration today for multiple reasons. First, the theme of dividend growth isn’t confined to the U.S. DIVS provides exposure to that trend because half its weight is allocated to ex-US companies. That includes exposure to prominent payout growth markets, including the U.K., Switzerland, Australia, and Taiwan.

Second, DIVS is a departure from many traditional dividend ETFs, which either focus on yield or companies’ histories of raising payouts. Rather, DIVS’ managers focus on cash flow, balance sheet strength, and value factors. The first two can confirm a company’s ability to sustain and grow dividends, while value can be a sign that investors aren’t overpaying for those payouts.

“Investors need to decide what they want to achieve and then pick the appropriate ETF. Is it growth, income, or both? Will this investment be part of a retirement portfolio?” according to the Journal.

In today’s environment, it’s tempting to reach for yield with dividend stocks because bonds are offering so little of it. However, dividend investing is about playing the long game. As an actively managed ETF, DIVS can steer clear of possible dividend offenders while focusing on the most attractive, sustainable payouts and providing international diversification in the process.

For more news, information, and strategy, visit the Dividend Channel.

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.