Not much is working in equity markets in 2022, but among the clear sources of “less bad” are dividend growth stocks and the related exchange traded funds.
High dividend stocks and ETFs are beating the broader market, but so are dividend growth funds. Take the case of the Invesco Dividend Achievers ETF (PFM). PFM, which turned 17 years old earlier this month, is beating the S&P 500 by 600 basis points year-to-date.
While high dividend strategies are shining this year, S&P 500 dividend growth is hitting new records, underscoring the viability of ETFs such as PFM.
“Great dividend-income strategies take steps to control their exposure to firms whose dividends might be at risk,” noted Morningstar analyst Daniel Sotiroff. “It’s a careful compromise between two competing forces, balancing yield with financial stability. Often the best portfolios land somewhere in the middle. They don’t have the highest yields, nor do they strictly focus on the highest-quality stocks.”
Regarding quality, the $636 million PFM follows the NASDAQ US Broad Dividend Achievers™ Index, which mandates that member firms must have payout increase streaks of at least 10 years. While definitions of quality vary, payout growth is one of the hallmarks of the factor.
“There is no one right way to emphasize quality in a dividend-income strategy, but it should be noticeable and consistent over time. The quality factor itself is somewhat squishy as it can be defined in a number of ways. Many strategies have converged on several metrics, typically some combination of profitability, earnings stability, and low dividend payout ratios, among others,” added Sotiroff.
A well-constructed dividend ETF should be sector-agnostic, and PFM is, to an extent. In reality, its lone constraint is the 10-year dividend increase streak requirement.
That actually works in favor of investors because the fund is lightly allocated to sectors known for high dividends, such as energy and utilities. Companies with unusually large dividend obligations can often turn out to be dividend offenders.
Conversely, PFM devotes almost 37% of its weight to technology and healthcare stocks. In recent years, those two sectors have been two of the leading sources of S&P 500 dividend growth, and both are littered with high-quality stocks.
“Well-constructed dividend-income portfolios should have above-average yields and above-average quality characteristics, like high profitability and low or reasonable dividend payout ratios,” concluded Sotiroff.
PFM checks those boxes as well.
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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.