Two of the big lessons taught by the 2020 coronavirus bear market are that dividend durability matters, and that when markets head south and encourage companies to rapidly conserve cash, some are apt to cut payouts.
That’s the opposite of dependability and durability. Investors can access reliable dividends with the VanEck Vectors Morningstar Durable Dividend ETF (DURA). DURA, which turns three years old later this month, tracks the Morningstar U.S. Dividend Valuation Index. That benchmark is designed to deliver to investors the elusive combination of high dividend stocks from financially healthy companies with attractive valuations.
The combination is elusive because many high dividend companies are richly valued and some others are financially challenged, meaning that negative dividend action could eventually be in the cards. On those points, DURA’s methodology is important.
“Distance to Default, Morningstar’s measure of financial health and gauge of future distress, reflects a firm’s likelihood of bankruptcy and has historically been an effective predictor of dividend cuts. Selecting companies with the lowest probability of default helps reduce the probability of future dividend cut,” says VanEck analyst Coulter Regal.
In plain English, the further a company is from default, the less likely it is to cut or suspend its dividends. As for avoiding some of the frothy multiples associated with defensive sectors and high dividend yield companies, DURA has avenues for doing just that.
“Morningstar’s estimate of a company’s intrinsic value, their Fair Value estimate, incorporates an assessment of the company’s economic moat and a projection of the sustainability of its profit potential over time. Consideration of fair value may allow for a portfolio of better valuations and greater upside potential while maintaining an attractive dividend yield,” according to Regal.
Speaking of sector exposures, DURA allocates over 41% of its weight to the healthcare and consumer staples sectors. Not only are those defensive sectors, but they’re a pair with two of the best track records of long-term dividend growth in the S&P 500. In the case of healthcare, the sector is home to some of the largest cash stockpiles in corporate America, confirming ability to support and grow dividends.
A significant portion of DURA’s above-average yield of 3.12% is sourced through a 24% combined weight to communication services and utilities stocks. Financial services stocks, which are renewing reputations as sources of payout growth, account for 10% of the fund’s roster.
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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.