Dividend stocks and ETFs should be dependable, but some funds in this group make it a point to focus on dependability. That’s the case with the VanEck Vectors Morningstar Durable Dividend ETF (DURA), which recently celebrated its first anniversary.
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.
Many dividend ETFs either focus on high yields or for how long companies have boosted payouts. Those are popular strategies that are embraced by many investors and those methodologies can prove useful, but DURA takes a different approach to dividend dependability.
“Many dividend strategies, whether active or indexed, tend to fall into one of two camps: strategies targeting high yield stocks, or strategies that focus on companies that have a consistent history of paying dividends or increasing dividends,” said VanEck in a recent note. “Both can be sound strategies, and many investors may even combine the two schools of thought to isolate high yielding companies that have grown dividend distributions over time.”
Depending On DURA
DURA allocates over 48% of its combined weight to the healthcare, industrial and financial services sectors. Those groups are viewed as value destinations that are more dividend growth than high-yield plays, which is relevant because high dividend stocks aren’t risk-free.
“Focusing on high yielding stocks can lead investors to areas of the market that have been under recent duress (as stock prices fall, yield generally rises) or to companies for which the market requires an attractive yield as compensation for ownership,” according to VanEck. “Many high yielding stocks are high yielding for a reason. Similarly, relying solely on a company’s history of dividend payments can lead to situations like 2008 and 2009, when many companies with a decades-long track record of paying distributions were forced to suspend shareholder payments.”
DURA, which is up almost 20% this year, allocates just 7.1% of its weight to utilities stocks and has no real estate exposure, indicating that it mostly steers clear of high-yield sectors.
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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.