With a trailing 12-month dividend yield of 1.06%, the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT) is not known as a high dividend play, but there is another dividend benefit to consider with wide moat firms: dividend safety.
While not all of MOAT’s 49 holdings are dividend payers, the fund’s components that do pay have dividends have payouts that look safe and several of those names have displayed solid dividend growth with the potential to continue that trend.
The $1.6 billion MOAT tracks the Morningstar Wide Moat Focus Index, “which is intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar’s equity research team,” according to Morningstar.
“By targeting companies with competitive advantages and healthy balance sheets, the methodology emphasizes dividend payments that can be sustained and ultimately grown over time,” said Morningstar in a recent note. “The assessment of competitive advantage relies on the insights of Morningstar’s equity analyst team, whose proprietary Morningstar Economic Moat Rating measures the sustainability of the profits that fund dividends. The methodology also incorporates Distance to Default, a measure of financial health that aims to forecast the likelihood of bankruptcy.”
Other Ideas
MOAT’s success spurred the creation of the VanEck Vectors Morningstar Durable Dividend ETF (DURA) and VanEck Vectors Morningstar Global Wide Moat ETF (GOAT).
DURA seeks to provide exposure to high dividend yielding U.S. companies with strong financial health and attractive valuations, according to Morningstar. DURA seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Morningstar® US Dividend Valuation IndexSM. The Index leverages Morningstar’s forward-looking fair value assessments as well as its proprietary quantitative Distance to Default score, which helps target financially strong companies with a higher probability of sustaining dividend payments.
MOAT currently allocates about 65% of its combined weight to the healthcare, consumer staples and technology sectors. Those groups are home to some of the strongest balance sheets and most impressive dividend growth track records in Corporate America.
“The wider the moat, the less likely a subsequent dividend cut. No-moat companies are far more likely to experience dividend cuts than narrow-moat companies—and narrow-moat companies are more likely to cut dividends than wide-moat companies,” according to Morningstar.
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