Third-quarter dividend growth was solid for S&P 500 member firms and more than 80% of the benchmark U.S. equity gauge currently pay dividends.
Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
The Fidelity Core Dividend ETF (NYSEArca: FDVV) delivers exposure to some dependable dividend growers. In fact, FDVV is dedicated to consistent dividend growth as highlighted by the methodology behind the Fidelity Core Dividend Index.
“The Fidelity Core Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends,” according to Fidelity.
Stocks with steady yields reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends.
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Investors may also consider consistent dividend growers as a way to gain exposure to this group of quality companies as dividend growers and high quality stocks share a number of similar characteristics.
Bolstering the case for FDVV is that the ETF focuses on new sources of dividend growth. When many investors think of ETFs dedicated to dividend growth, they think of funds focusing on slower-moving sectors such as consumer staples. However, FDVV allocates over 27% of its weight to technology stocks, one of the largest weights to that sector among all dividend ETFs.
Additionally, FDVV allocates about 40.6% of its combined weight to the financial services and consumer discretionary sectors, groups that have been major contributors to S&P 500 dividend growth in recent years.
Conversely, FDVV features light allocations to rate-sensitive staples and utilities stocks. Plus, the Fidelity ETF only has scant energy exposure, which is a plus because that sector has been home to the bulk of the negative dividend action in the S&P 500 for two years.
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