As investors re-evaluate investment portfolios after a year of volatility, some may be considering ETFs that target a dividend growth strategies for a stable core position to prop up their portfolios.
“A large body of research has found that the stocks of companies that can consistently grow their dividends over time have been attractive sources of income and long-term wealth creation. Dividend growth stocks also have a strong record of long-term outperformance, owing in large part to their resilience in market downturns. This has been true despite periodic bouts of underperformance, which typically occur when risk appetite is high and faster growing, riskier stocks are in favor,” according to a recent FTSE Russell research note.
The current market environment may support the dividend growth outlook. A steady U.S. economy and the implementation of the corporate tax cuts allowed companies to grow earnings and free cash flow, which helped many accumulate record levels of cash on corporate balance sheets.
Looking closer at the dividend growth strategy, the investment may also provide a quality tilt or a more defensive position for an investment portfolio.
“Reliable dividend growers are typically companies with solid quality credentials, such as stable earnings, strong balance sheets and conservative capital management policies,” according to FTSE Russell.
The Russell 2000 Dividend Growth Index
For example, the Russell 2000 Dividend Growth Index has typically experienced pulled back less during market crashes while still participating in rallies, which have helped the index experience significant outperformance over full market cycles, with less volatility in between. Specifically, the Russell 2000 Dividend Growth Index showed a 12.4% return with an annualized volatility of 15.1% for the period of June 1998 through July 2018, compared to the 8.8% return of the parent Russell 2000 Index with an annualized volatility of 19.4%.