U.S. dividend stocks and exchange traded funds have been solid though not spectacular performers to start 2017, but that is still a decent thing to say against the backdrop of rising interest rates. The SPDR S&P Dividend ETF (NYSEArca: SDY), one of the largest U.S. dividend ETFs, is up 3.2% year-to-date.
SDY holds firms that have a minimum dividend increase streak of 20 years. Moreover, SDY follows a yield-weighting methodology that allocates a larger weight toward those with higher yields, so the portfolio leans toward more mid-sized companies.
While a rise in rates would diminish the attractiveness of dividend stocks with premium valuations and low growth, more high quality dividend payers or the group of dividend growers may stand out. The dividend growth exchange traded fund strategy has helped investors capture the upside potential of a strengthening equities market through quality company exposure.
“Within the S&P 1500 Composite, the fund looks for companies that have increased their dividends every year for at least 20 years and weights them according to their dividend yield. It applies liquidity and market cap screens and limits individual holdings to no more than a 4% weighting. What’s left is a portfolio of just over 110 dividend aristocrat names in which the higher yields get a heavier allocation,” according to ETF Daily News.
Income-minded investors have also typically gravitated toward these high quality companies as firms that regularly raise dividends also tend to be confident about their ability to continue paying the dividends as the dividend increases are also calculated in line with future growth.
Companies with a record of raising dividends are more attractive than usual since they issue their dividends cautiously. These dividend payers typically include higher quality companies that are more cautious when raising dividends since they would do so without stretching their balance.
SDY allocates 30.5% of its weight industrial and consumer staples stocks with financial services and utilities names combining for another 27%.
“The dividend aristocrat strategy has historically worked very well for investors over the long term and this fund is no exception. Over the past 10 years, the S&P High Yield Dividend Aristocrats Index has outperformed the S&P 1500 by nearly 70 basis points annually and has topped the S&P 500 by even more,” according to ETF Daily News.
For more information on dividend stocks, visit our dividend ETFs category.