Stocks with strong environmental, social, and governance (ESG) credentials are usually viewed through a growth lens. That’s partially the result of so many companies in the communication services and technology sectors looming large in ESG funds.
That doesn’t mean it’s hard to find stocks with impressive ESG resumes with value traits. Nor is it difficult to locate the combination of ESG and dividends — something many investors previously thought of as unheard of. The Xtrackers S&P ESG Dividend Aristocrats ETF (SNPD) is an exchange traded fund that provides efficient access to the dividend/ESG combination.
SNPD, which debuted last month, follows the S&P ESG High Yield Dividend Aristocrats Index. That’s lofty dividend DNA because that index is a derivative of a benchmark that requires member firms to have minimum payout increase streaks of 20 years. Add to that, SNPD is pertinent for equity investors right now.
“High-dividend-yielding stocks have been prevalent in 2022, as rising interest rates have put downward pressure on long duration assets. At the same time, market participants are increasingly seeking to align investments with their personal and societal values. The S&P ESG High Yield Dividend Aristocrats® Index may be a strategy that checks both of these boxes,” noted S&P Dow Jones Indices.
SNPD’s underlying index also requires components to have increased for at least 20 years. From there, an ESG overlay is added, including the expulsion of firms in the lowest quartile of S&P DJI ESG Scores. Standard ESG exclusions, including alcohol, civilian firearms, gambling, and tobacco, among others, are also applied.
While some of those industries are homes to dividend stocks, the ESG exclusions don’t hinder the performance of the S&P ESG High Yield Dividend Aristocrats Index. On a back-tested basis, the index has been topping the S&P 1500 for more than a decade, with that gap becoming noticeable in recent months.
“Recently, the outperformance of the S&P ESG High Yield Dividend Aristocrats Index versus the S&P 1500 has been even more pronounced. Year-to-date, the S&P ESG High Yield Dividend Aristocrats Index has outperformed the benchmark by 15.25%. One reason for this is that high-yielding indices, mainly through their lower durations, offered greater protection against rapidly rising interest rates compared to the benchmark,” added S&P.
Even with the ESG overlay, SNPD has a profile that’s familiar among dividend ETFs in that it allocates about half its weight to consumer staples and industrial stocks, and owing to the dividend increase requirement, the fund is lightly allocated to technology names and has no exposure to the communication services sector.
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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.