S&P 500 Earnings Growth Expectations Favorable for Dividend ETFs | ETF Trends

The S&P 500 is expected to report year-over-year earnings growth of 4.3% for the second quarter as of Friday, according to John Butters, senior earnings analyst at FactSet.

Based on the average improvement in earnings growth during each earnings season due to companies reporting positive surprises, it is likely the index will report earnings growth between 9% and 12% for the second quarter, Butters wrote in a recent insight.

“Over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 8.8% on average. During this same period, 77% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average,” Butters wrote. “As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has increased by 8.1 percentage points on average (over the past five years) due to the number and magnitude of positive earnings surprises.”

Strong earnings growth, especially in the face of a potential recession, is particularly favorable for investors who have been allocating to dividend ETFs as earnings growth and dividend increases tend to move in tangent.

Investors have been increasingly looking to dividend ETFs as the market sentiment remains defensive. Dividend, value, and low volatility strategies outperformed in the first half of the year, whereas growth and high beta have been the year’s worst performers, according to S&P Dow Jones Indices.

One fund that offers exposure to the largest dividend-paying companies in the S&P 500 is the ALPS Sector Dividend Dogs ETF (SDOG). The fund tracks the S-Network Sector Dividend Dogs TR Index, which uses the S&P 500 as its starting universe and then selects the five highest-yielding securities in ten of the eleven GICS sectors (excluding the Real Estate sector), according to ALPS. The fund equal weights at the stock and sector level, providing diversification while avoiding sector biases. 

Other dividend ETFs to consider include the SmartETFs Dividend Builder ETF (DIVS), the WisdomTree US High Dividend Fund (DHS), and the T. Rowe Price Equity Income ETF (TEQI).

For more news, information, and strategy, visit the ETF Building Blocks Channel.

vettafi.com is owned by VettaFi, which also owns the index provider for SDOG. VettaFi is not the sponsor of SDOG, but VettaFi’s affiliate receives an index licensing fee from the ETF sponsor.