At a Rough Time for Dividends, Going Active Could Help | ETF Trends

As has been widely documented, dividend investors are facing trying times this year amid a spate of S&P 500 payout cuts, but the carnage isn’t confined to the U.S. as some market observers are forecasting a 35% drop in global payouts this year.

Active strategies, such as the Principal Active Global Dividend Income ETF (CBOE: GDVD). GDVD will try to generate current income and long-term growth of income and capital by investing in dividend-paying equity securities. The advisors will utilize quantitative screens and research on an industry and company level to identify and monitor companies it believes have the commitment and capacity to pay dividends.

At a time when quality matters, GDVD tilts toward dividend growers, not risky high-yield fare.

“Dividend-growth strategies, on the other hand, prioritize companies whose dividends are typically modest in relation to their earnings and their stocks’ yields versus the broader market but are growing at an above-average rate along with their businesses,” said Morningstar in a recent note. “The challenge for income-oriented investors with these strategies is that the current yield may not be enough to meet one’s needs.”

Going With GDVD

The $658.35 million GDVD holds small-, medium- and large-cap companies in both growth and value styles, along with real estate investment trusts or REITs. The fund will also hold international companies, with at least 40% of net assets in foreign and emerging market securities. GDVD will typically hold investments tied economically to at least three countries outside the U.S.

Dividend growers and payers have historically had higher returns with less risk than non-dividend paying stocks. GDVD’s 62 holdings have an average market capitalization of $50.63 billion.

“Should volatility return, as many expect, a benefit of dividend-paying stocks is they offer some downside protection,” according to Morningstar. “Here, dividend-growth strategies have an advantage over their high-dividend-yield counterparts in two respects. First, dividend-growth stocks are typically more resilient.”

The need for global income is more readily apparent as U.S. companies are slashing their dividends in order to preserve cash thanks to the coronavirus pandemic. As more companies are looking to stymie the effects of the pandemic by cutting dividends, investors can look to global yield opportunities. Seeking fixed income opportunities around the globe could help yield-hungry investors satiate their appetites while sectors like manufacturing return to normal.

“Dividend-growth strategies are often less susceptible to dividend cuts or suspensions,” adds Morningstar.

For more on multi-factor strategies, visit our Multi-Factor Channel.

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.