With global dividends rebounding significantly in 2021 and with that trend expected to continue next year, many advisors and investors are revisiting dividend exchange traded funds.
However, it’s vital to remember that this category is home to an array of funds that sound alike, but in reality are quite different from each other. Finding standouts in the group is difficult, but by focusing on some key metrics, investors can unearth compelling ideas, including the SmartETFs Dividend Builder ETF (DIVS).
“Changes to dividend payments don’t occur in a vacuum. Stocks with rising dividends are often backed by financially stable companies with strong sales and profit growth that support those higher cash distributions,” says Morningstar analyst Daniel Sotiroff. “These profitable firms often trade at higher prices relative to their fundamentals, including dividends, and rarely if ever land in the higher-yielding segment of the market.”
Actively managed, DIVS eschews emphasizing yielding. Indeed, in today’s low interest rate environment, high-dividend stocks are seductive to many income-starved investors. However, it’s often companies with the highest dividend yields that are dividend offenders. There are good reasons to avoid the highest of the high yields, and DIVS does just that.
“Dividend-payers with falling prices are more likely to find their way into high-yield portfolios. But it’s important to realize that share prices often fall for a reason: typically when a company’s outlook becomes less rosy,” adds Sotiroff.
A primary benefit of DIVS is that it limits risk. In theory, simply embracing dividend equities should accomplish that goal. After all, dividend stocks are historically less volatile than their non-dividend counterparts. However, there is some risk with high-yield equities. Fortunately, DIVS avoids that by emphasizing quality and durability, among other factors.
“While these risks cannot be completely avoided, well-constructed dividend-income funds take steps to control their exposure to these perils and occupy a reasonable middle ground between yield and limiting risk,” notes Sotiroff.
Bottom line: Dividend investors want the odds on their side — short odds payouts will rise and long odds dividends will be cut or suspended. DIVS checks those boxes.
“Digging into dividend-income strategies may not always be straightforward. In some instances, strategies may take measures to control risk that look great on paper but don’t live up to their billing,” concludes Sotiroff.
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.