Investors continue looking for new sources of income and yield, but tried and true dividend stocks should remain part of that equation. Scores of exchange traded funds offer up exposure to dividend-paying stocks.
However, a series of interest rate hikes should not be viewed as an indictment of dividend stocks and exchange traded funds. Some dividend ETFs can help investors endure those shocks, including new ETFs such as the Fidelity Core Dividend ETF (NYSEArca: FDVV), which debuted in September.
Cementing its emphasis on dividend growth stocks, FDVV aims to hold large- and mid-cap dividend-paying stocks that are expected to continue to pay and grow their dividends. Component holdings have shown historically high dividend yields, low dividend payout ratios and high dividend growth. The ETF had $50.7 million in assets under management as of May 24th, according to issuer data.
FDVV currently yields almost 3.8%, an impressive number when considering this is not a high dividend strategy, but that high yield is not necessarily a cause for concern.
“Originally, I thought the fund’s yield would be just a little north of 3%. I get a little worried about the fund’s risk level with a yield closer to 4%. So far, risk metrics suggest FDVV is a fund with average risk but I’d like to see a little more history before labeling it as such,” according to a Seeking Alpha analysis of the ETF.
FDVV could be ideally positioned to endure higher interest rates, should the Federal Reserve opt to resume that trend later this year. While a rise in rates would diminish the attractiveness of dividend stocks with premium valuations and low growth, more high quality dividend payers or the group of dividend growers may stand out.
Stocks with steady yields reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends.
FDVV is top heavy at the sector level as technology and financial services stocks combine for over 49% of the ETF’s weight. However, those have been two of the best sectors for dividend growth among U.S. stocks over the past several years. Consumer discretionary and real estate stocks combine for 28.5% of FDVV’s weight.