Dividend stocks and the related exchange traded funds are outperforming the broader market this year, with much of that positivity attributable to high-dividend fare.
For investors, that’s been a boon when interest rates are still low, and bonds falter, among other reasons. However, one of the rubs with high-yielding stocks is that many of those names hail from defensive sectors, and while those groups often have lower volatility than other sectors, they often sport elevated valuations as a result.
That’s a reminder that defensive and value stocks aren’t always the same thing. It’s also a reminder that investors often perceive intimate links between value and dividends. To an extent, that’s true, and some ETFs reflect that proposition.
Interestingly, some ETFs that aren’t dedicated value ETFs do overvalue traits and inroads into quality dividend investing. That group includes the SmartETFs Dividend Builder ETF (DIVS) and the SmartETFs Asia Pacific Dividend Builder ETF (ADIV). DIVS and ADIV could be relevant considerations into year-end and beyond because some market observers see value regaining momentum over growth.
“Current relative valuations within the equity market imply the Value factor will generate strong returns over the medium term,” Goldman Sachs analyst Cormac Conners wrote in a recent report. “The historically large magnitude of the current valuation gap between the cheapest and most expensive stocks suggests robust medium-term returns for value.”
DIVS, which includes both U.S. and international stocks, is designed to emphasize quality, but several of its components currently display favorable value traits.
“Amid this backdrop, the bank outlined a basket of 25 stocks for investors on the lookout for value opportunities. These are names with a median price-earnings ratio of 9 times that Goldman identifies as value stocks even though value-focused mutual funds are underweight or have avoided buying them just yet. Once they start buying in, the bank expects shares to rise,” says Samantha Subin for CNBC.
Among the DIVS member firms on that list are Dow Jones Industrial Average component Cisco Systems (NASDAQ: CSCO), which also features an increasingly attractive dividend growth track record.
As for ADIV, the value proposition is straightforward because ex-US markets, both developed and emerging, have long traded at discounts – deep in some instances – relative to broader domestic equity benchmarks.
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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.