Dividend growers may serve a dual role in portfolios, seeking to provide both current income and the potential for income growth and capital appreciation.
A long-term position in a dividend growth ETF has the potential to add value by providing consistency in portfolios. Compared to other dividend-yielding funds, dividend growth ETFs may demonstrate favorable risk/return fundamentals and have even done well compared to the benchmark S&P 500.
“I don’t think the world actually understands that dividend growth stocks have produced good risk-adjusted returns over very long periods of time. Obviously, growth stocks have done really well too. So, non-dividend payers can do well — but you take more risk,” William Muggia, president, CEO, and CIO of Westfield Capital Management Company, said during a webcast on June 26.
Muggia is the portfolio manager — and largest individual investor — in the Harbor Dividend Growth Leaders ETF (GDIV). GDIV is an actively managed dividend growth ETF with $186 million in assets under management.
According to Muggia, active portfolio managers are better positioned to navigate dividend growers than index funds. It’s part of the job of an active manager to avoid dividend cuts and turn to high-quality opportunities.
While the post-GFC era rewarded growth at any price, there’s the potential that it won’t work in the current regime. Managers may have to work harder to identify sustainable opportunities that will add long-term value.
Seek Dividend Growth Instead of High Dividends
High dividend yield stocks, like AT&T and Verizon, generally do not do well in a rising rate environment, Muggia said. Dividend growth, however, may be a sign of a healthy business and a management team that believes in the viability of its long-term growth.
“A dividend payment is usually written in stone when the board decides to do it,” Muggia added. “So these companies raising the dividend have a lot of confidence in their earnings growth. That’s why we like these types of companies.”
“As a growth guy, I’m definitely biased towards dividend growers,” Muggia added. “Just paying a dividend… doesn’t excite me unless there’s some upside there.”
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Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.
All investments involve risk, including the possible loss of principal. Please refer to the Fund’s prospectus for additional risks. For current performance, holdings, and important information: GDIV
There is no guarantee the investment objective of the Fund will be achieved. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and under-perform the market. There is no guarantee that a company will pay or continually increase its dividend.
The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice.
The Fund may invest in a limited number of companies or, at times, may be more heavily invested in particular sectors. As a result, the Fund’s performance may be more volatile, and the value of its shares may be especially sensitive to factors that specifically effect those sectors. The Fund may invest in foreign securities, which may be more volatile and less liquid due to currency fluctuation, political instability, government sanctions, and social and economic risks. Foreign currencies can decline in value and can adversely affect the dollar value of the fund.
Past performance is not a guarantee of future results.
Westfield Capital is the subadvisor for the Harbor Growth Leaders (GDIV).
This article was prepared as Harbor Funds paid sponsorship with VettaFI.
Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.