Dividend growth is on the mend, but with scars still fresh from last year’s spate of negative dividend action, investors should prioritize quality and reliability. The ProShares S&P 500 Aristocrats ETF (CBOE: NOBL) rolls both objectives into one fund.
NOBL tracks the S&P 500 Dividend Aristocrats Index and 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.
The ETF remains relevant at a time when some investors may be tempted to stretch for yield, while others dwell on the state of domestic dividends.
“This issue takes on perhaps greater significance given the low yield environment in which we find ourselves,” according to ProShares research. “Many income investors have been forced to assume greater risk over the years to earn adequate levels of yield. If that yield cannot grow above the rate of inflation (at a minimum), the challenges become even greater—and yield traps abound. As tempting as it may be to turn to higher-yielding strategies, dividend sustainability in today’s economically challenging times remains an open question.”
NOBL: An Ideal Income Strategy, Downside Buffer
Dividend-paying stocks can also help insulate investors from a broad market pullback. That’s particularly true of this model portfolio’s components, which, by virtue of their quality traits, tend to display less volatility in rough markets.
NOBL holdings tend to showcase healthy companies with strong cash flow traits.
“One of the best ways to identify companies capable of producing durable dividends is to look at their fundamentals. Specifically, you should look at their cash flows, which are the lifeblood of dividends. Over time, companies must create enough cash flow to pay expenses, invest in their business via capital expenditures, service their debt, and (sometimes) return money to shareholders via dividends and buybacks,” according to ProShares.
As a result, companies are feeling better about returning more of their capital to shareholders. S&P 500 dividends are expected to grow 3% in 2021 from 2020, according to FactSet. The payout ratio—the percent of earnings companies use to pay dividends — is expected to fall to about 35% from 42%, but the pure growth in dividend dollars still provides an attractive yield opportunity at current prices.
Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team conviction in their businesses.
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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.