Look to Dividend Growth ETFs in Today's Market | ETF Trends

Investors should consider the potential benefits of dividend growth exchange traded fund strategies as many seek out investments to mitigate the effects of market volatility and elevated inflation.

In the recent webcast, Why Dividend Growth Matters in Today’s Market Environment, Shana Martin, product management and development at Nuveen, argued that the fed will remain hawkish as they take aim at rate hikes into 2023. Meanwhile, the risks causing elevated volatility, especially inflation, are likely to persist, but we may not see a deep or prolonged recession.

“We’re particularly keen on dividend growers, as they tend to be more defensive, can weather ongoing market volatility, and provide income,” Martin said.

Martin noted that the persistent higher-than-average inflation going forward could be a headwind for traditional allocations. From a low of 0.1% in May 2020 to a high of 9.1% on June 2022, consumers have been feeling the pressure.

In the background, Martin outlined the ongoing hurdles, such as geo-political risks, Federal Reserve actions, and inflation, which all are contributing to uncertainty.

As investors try to meet these challenges, David Park, portfolio manager at Nuveen, highlighted the benefits of dividend growers. For example, since 1973, dividend growers have provided higher returns with less risk. A hypothetical $100 investment in dividend growers in 1973 would now be worth $12,278 compared to today’s value of $680 for an investment of $100 in non-dividend payers.

Companies with persistent dividend growth have generally provided competitive returns during periods of market volatility. When comparing the S&P 500 dividend growers versus non-dividend payers, dividend growers showed an average 0.9% excess return across periods when the CBOE Volatility Index increased.

Furthermore, Park pointed out that dividend growers have outperformed in past periods of rising rates, like the environment we are seeing today.

Historically, dividend growers have also outperformed when the yield curve has inverted, as well as during subsequent recessions, Park added.

To help investors access this group of dividend growers, Park highlighted the actively managed Nuveen Dividend Growth ETF (NYSE Arca: NDVG), which focuses on top mid- to large-cap companies that have the potential for sustainable dividend growth and provides a total return based on income and capital appreciation while also reducing risk exposure.

“By investing in high-quality companies committed to sustainable and growing dividends, the portfolio may be a compelling starting point for an investor’s equity allocation,” Park said.

“The portfolio owns fundamentally attractive but often overlooked dividend-paying companies with a broad range of yields, including those initiating dividends, driving enhanced diversification potential.”

Specifically, the NDVG tries to achieve a portfolio dividend growth rate greater than the S&P 500, a portfolio beta less than the S&P 500, and a portfolio yield equal to or greater than the S&P 500.

“We seek to outperform the index while experiencing less volatility and provide better downside risk management through a broadly diversified portfolio that maintains high active share,” Park said.

NDVG also tries to follow a differentiated approach to dividend growth names. Unlike many of our peers, the dividend growth investment team will research and own fundamentally attractive but often overlooked dividend payers such as companies with a yield below the S&P 500 and recent dividend initiators with less than 10 years of consecutive dividend increases.

“We believe our fundamental approach to investing and our broad investment universe enhances dividend growth, portfolio diversification, and total return potential,” Park added.

NDVG is also not some new strategy that Nuveen recently cooked up. The underlying actively managed fund strategy already has a long-standing track record to back it up. Along with NDVG, Nuveen’s dividend growth strategies include the Nuveen Dividend Growth Fund (NSBRX), a separately managed account.

“By offering Nuveen investment expertise within the ETF wrapper, we provide investors with the opportunity to leverage the attractive features of an ETF – and the capabilities of our seasoned portfolio managers,” Martin said.

Financial advisors who are interested in learning more about dividend growth strategies can watch the webcast here on demand.