In the world of dividend-oriented exchange traded funds, advisors and investors find three primary structures. Those are as follows: ETFs focusing on yield, those emphasizing payout growth, and funds that blend those two concepts.
The ALPS O’Shares U.S. Quality Dividend ETF (OUSA) is a play on dependable growth. As such, its trailing 12-month dividend yield of 1.44% isn’t eye-catching. But that metric implies ample room for payout growth. That’s a trait equity income investors should prize. In fact, OUSA’s emphasis on reliable payout growth could be one of its primary advantages over extended holding periods.
As experienced dividend investors, high yield stocks are sensitive to changes in interest rates, which is fine when rates are moving lower, but it’s a negative when the Federal Reserve is tightening. Not only that, many high-dividend firms end up to be offenders by way of cuts or suspensions. OUSA could also offer advantages over funds that blend dividend growth and yield. That’s because the inclusion of the latter metric often leads to slower payout growth.
Dividend ETF OUSA Offers Safety
OUSA’s allure is due in part to the implication of safety that comes along with dividend-growth style.
Investors leaning into that methodology “are willing to accept lower current yields in exchange for higher future payouts and typically favor stocks with durable competitive advantages, long histories of dividend growth, and strong profitability,” noted Morningstar’s Daniel Sotiroff.
OUSA’s safety proposition is bolstered by its sector exposures. While many high-dividend ETFs are heavily allocated to debt-laden real estate and utilities stocks — two of the most capital-intensive sectors — OUSA’s quality profile shines bright by way of a combined 38% allocation to technology and healthcare stocks. Those sectors are homes to some of the most cash-rich companies in the U.S.
Of course, OUSA isn’t perfect. There are times when dividend-growth stocks lag the broader market. The good news is ETFs like OUSA usually aren’t littered with offenders. That’s a positive for numerous reasons, including that cuts or suspensions often lead to short-term punishment.
“Dividend-growth funds typically steer clear of such stocks. They key in on companies with greater profitability and strong competitive advantages that usually translate into better performance during volatile periods,” added Sotiroff. “But that stability comes with a caveat: They don’t always keep pace with the broader market during rallies. Dividend-growth funds typically underperform the market during periods of exceptionally strong growth, when expensive stocks that pay little, if any, dividends fuel the market’s rise.”
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