While a high payout ratio might sound appealing to the shareholder, it could also send red flags.
“If a company is paying out too high of a portion of their earnings to dividends, then that can choke off growth,” said Barnes. “It can also perhaps lead to a dividend cut because that payout can proceed at an unsustainable level an so what we look for are those high dividend yielding stocks that have a low payout ratio, which tend to be indicative of having the ability to pay that dividend regularly in the future.”
Similarly, stocks screened for inclusion in FDVV are also based on their dividend growth. Companies that pay out a high portion of their dividends too early in their life cycle may not be as fundamentally sound as those that have been able to grow dividends at a sustainable rate.
“Those high dividend yielding stocks that have been able to grow their dividends over time tends to be an indicator that they can continue to pay dividends in the future,” said Barnes.
In essence, FDVV gives investors that added layer of protection by not allowing high dividend yields by themselves to be the driving force behind their investments.
“Dividend yield is a very attractive factor, but you need an element that provides a level of protection as well so you’re not falling into the yield trap,” said O’Reilly.
While the prospects for high dividend yields is certainly appealing, it begs the question of just how FDVV can stand up to the rigors of volatility the markets have been experiencing? The answer lies in how well-crafted FDVV is in terms of portfolio construction.
“We take a much more thoughtful approach to portfolio construction where we seek to minimize the unintended risks,” said Barnes.
That craftsmanship in terms of constructing FDVV is apparent in the Sharpe Ratio–a measure of an asset’s return relative to its exposure to risk. In this case, FDVV is one of the best in its class.
“It (FDVV) has one of the highest Sharpe Ratio not only among dividend products, but just among ETFs in general,” said Barnes.
For more information on FDVV, click here.
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