Rising interest rates are often viewed as a risk to dividend stocks and the related exchange traded funds. However, some dividend ETFs can help income investors stick with dividend-paying stocks even as the Federal Reserves continues boosting borrowing costs.
Consider the Fidelity Dividend ETF for Rising Rates (NYSEArca: FDRR). FDRR tries to reflect the performance of a group of large and mid-capitalization, dividend-paying companies expected to pay and grow their dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields. The positive correlation to Treasury yields and sector neutrality may help protect investors’ returns in rising rate environments, when high-yielding stocks and sectors tend to underperform.
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
FDRR tracks the Fidelity Dividend Index for Rising Rates, which 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 and have a positive correlation of returns to increasing 10-year U.S. Treasury yields,” according to Fidelity.
“This is not your grandfather’s retirement ETF as highlighted by an almost 25% weight to technology stocks — high relative to many other dividend ETFs. However, the technology sector historically performs well when rates rise. Sectors that do not — such as real estate, telecommunications and utilities — combine for less than 8% of FDRR’s roster,” reports InvestorPlace.
Many FDRR holdings also offer dividend growth potential or have already displayed impressive track records of payout 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 sheets.
FDRR charges 0.29% per year, or $29 on a $10,000 investment. That puts it at the lower end of annual fees on U.S. large-cap smart beta strategies. Plus, Fidelity clients can trade FDRR without commissions on the firm’s commission-free ETF platform.
For more information on dividend-paying stocks, visit our dividend ETFs category.
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.