Dividend stocks and related ETFs can be a good way for investors to diversify their portfolios and generate attractive long-term returns.
“Dividends are crucial to realizing the full potential of equity investing. I think many investors take for granted the power and impact that dividends have on long-term, total return. Most of the wonderful charts that show relative outperformance of various equity markets to other asset classes are assuming dividend reinvestment,” Brandon Rakszawski, Product Manager at VanEck, said.
Rakszawski pointed out that since the 1930s, about 40% of the S&P 500’s total return can be attributed to dividend and dividend reinvestment.
However, with traditional dividend-paying stock strategies, investors may be exposed to unintended risks. For instance, high dividend-yielding companies may be exposed to some perceived risk with equity investment in that company. For consistent dividend payers or dividend growers, investors are relying on historical patterns to repeat themselves in the future, and as we all know, past performance is no guarantee of future results.
“At VanEck we believe in a durable approach to dividend investing, this leverages forward-looking equity research to identify desirable dividend stock allocations,” Rakszawski said.
Specifically, the VanEck Vectors Morningstar Durable Dividend ETF (DURA) can help investors access a basket of high-yield dividend payers with value traits and healthy balance sheets.
DURA seeks to provide exposure to high dividend yielding U.S. companies with strong financial health and attractive valuations. The ETF seeks to replicate performance of the Morningstar US Dividend Valuation IndexSM, which leverages Morningstar’s forward-looking fair value assessments as well as its proprietary quantitative Distance to Default score to help target financially strong companies with a higher probability of sustaining dividend payments.
Rakszawski explained that Morningstar’s equity research analysts forecast future cash flows well into the future to arrive at a current intrinsic value for a company and will allocate to those companies that have high dividend yield and are trading at attractive prices relative to their fair value.
“By targeting those companies that are trading at attractive prices, relative to their fair value, the strategy is able to not only feature attractive valuations, but offer more potential upside to investors while maintaining an attractive dividend yield,” Rakszawski added.
Additionally, Morningstar uses assigns a distance-to-default score to assess and predict the probability of default or bankruptcy for a particular company, which has actually also been a reliable predictor of future dividend cuts.
For more information on dividend strategies, visit our dividend ETFs category.