With interest rates low and value stocks showing some signs of life, investors are reminded of the importance of skirting value traps. Fortunately, some dividend ETFs help with that objective, including the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL).
NOBL tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers.
“Value stocks are one example, as they tend to trade at lower prices relative to their fundamentals. While value stocks are indeed less expensive, they may represent a ‘value trap’—cheap for a reason,” according to ProShares research. “As a group, the companies in the S&P 500 Dividend Aristocrats Index offer a compelling alternative of historically attractive valuation, higher quality—as measured by credit ratings, price/earnings (P/E) ratios and return on assets (ROA)—resiliency, better total return, and higher historical dividend growth.”
Alternative to Low Volatility
Importantly and highly relevant today, NOBL is not a high dividend strategy. When sorting by dividend yield: companies in the highest quintile of dividend yield – those whose ability to pay may become stretched in challenging markets – account for more than double the number of dividend cuts and eliminations versus those in the bottom quintile with more modest dividend yields
Adding to the relevance of NOBL in the current market environment is that it can act as an alternative to low volatility strategies, plenty of which feature large allocations to high dividend equities.
“Other investors, noting the low bond yields in their fixed income portfolios, may consider high dividend-yielding equities,” according to ProShares. “As we’ve noted in our previous article, The Quality-Based Differences Developing in Dividends, a stock’s high yield may too often be an indicator of lower quality, with higher odds of a dividend cut.”
Despite some bumps in the dividend road, many of which were skirted by NOBL, the ProShares ETF and investing for payouts remain relevant, particularly in today’s low yield environment. Bottom line: NOBL offers quality and is a legitimate alternative to lagging value funds.
“As a group, companies that have consistently grown their dividends for at least 25 years present a compelling combination of quality at a reasonable price that may be a particularly robust alternative to large-cap tech and growth stocks and a more compelling choice than value,” notes ProShares.
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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.