On the recent webcast, How Quality Dividend Growers Can Help Fight the Crosswinds on Wall Street, Sam Stovall, Chief Investment Officer for CFRA, warned of some headwinds that could shake the markets but still pointed out some tailwinds that could maintain the overall course.
For instance, an aging bull market, elevated valuations, rising rates, risk of recession and political risks continue to weigh on the market. However, the ongoing corporate strength, low inflation, seasonal trends ahead, potential tax cuts and speed of recovery may still maintain the current course.
Stovall argued that the progression of earnings-per-share estimates may continue to prop up the markets as full-year 2017 EPS estimates have not collapsed like they did in 2015 and 2016. Actual quarterly EPS exceeded estimates in 22 of 22 past quarters by an average of 3.6%.
Furthermore, the U.S. is heading toward a seasonally strong period of the year. While the third quarter may be seasonally worst period since 1990, the fourth quarter has historically been the strongest period of the year, with the S&P 500 rising on average 4.9% and showing a positive average frequency of price rises 81% of the time.
One way for investors to identify companies that can outperform markets over time may be to look at companies that grow dividends, Kieran Kirwan, Director of Investment Strategy for ProShares, said. Companies that have consistently increased dividends outperformed those that did not and have done so with lower volatility.
“Quality and growth are the key. Companies that grew their dividends outperformed companies that didn’t. Companies that consistently grow their dividends tend to be high-quality with strong growth potential. These companies have been able to withstand repeated periods of market turmoil and still deliver strong returns with lower volatility,” Kirwan said.
High quality companies that continually grow dividends typically exhibit attractive investment characteristics like history of profit and growth, strong fundamentals, stable earnings streams, firm commitment to shareholders and management team conviction in the business.
One way to target this elite group of quality companies is through the S&P 500 Dividend Aristocrats Index, which specifically targets those that have grown dividends for at least 25 years. The portfolio has outperformed the S&P 500 under most market conditions and exhibited lower relative volatility compared to the broader benchmark.
Furthermore, Kirwan argued that the so-called dividend aristocrats may even outperform if rates continue to rise as they provide an all-weather dividend solution, compared to high-dividend stocks that may have greater tilts toward rate sensitive sectors.
The S&P 500 Dividend Aristocrats Index acts as the underlying index for the popular ProShares S&P 500 Aristocrats ETF (BATS: NOBL) and is comprised of companies that have consecutively raised dividends for at least 25 years.
Stovall also projected that the S&P 500 Dividend Aristocrats’ relative P/E ratio is projected to dip below long-term averages, which may open an attractive entry point to something like NOBL.
ProShares also offers the ProShares Russell 2000 Dividend Growers ETF (BATS: SMDV) and the ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS: REGL) for those seeking quality dividend growers in the small- and mid-cap categories, respectively. REGL tracks a Dividend Aristocrats Index. The mid-cap Dividend Aristocrats Index, though, only requires 15 consecutive years of increased dividends for inclusion. SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.
Investors can also diversify into international markets while tracking similar dividend growth strategies. For instance, the ProShares MSCI EAFE Dividend Growers ETF (BATS: EFAD) tracks developed market Europe, Australasia and Far East companies that exhibit a minimum dividend increase streak of 10 years. The ProShares MSCI Europe Dividend Growers ETF (BATS: EUDV) tracks the performance of the MSCI Europe Dividend Masters Index, which consists of at least 25 European companies that have consistently increased their dividends for at least 10 consecutive years. The ProShares MSCI Emerging Markets Dividend Growers ETF (BATS: EMDV) follows the MSCI Emerging Markets Dividend Masters Index, which targets MSCI Emerging Market components that have increased dividend payments each year for at least seven consecutive years.
Financial advisors who are interested in learning more about dividend growth strategies can watch the webcast here on demand.