It should be implicit that dividend investing, whether it be by individual stocks or via exchange traded funds, is a long-term strategy. After all, that’s the most effective way for market participants to leverage dividend reinvestment, or compounding, for success.
Still, short-termism often wins out among financial perspectives. Plus, at a time when growth stocks are the primary drivers of this year’s bull market, it’s easy for investors to become overly critical regarding the 2023 laggard status of many dividend ETFs.
That doesn’t diminish the long-term appeal of funds such as the VanEck Morningstar Durable Dividend ETF (DURA). DURA, which follows the Morningstar US Dividend Valuation Index, is basically flat year-to-date, meaning it’s trailing the S&P 500 by a wide margin. However, barely more than seven months of performance isn’t adequate when it comes to accurately gauging the long-term potency of dividend investing.
To DURA for Dependability, Quality
DURA, which turns five years old in October, offers investors some clear benefits. Namely, its underlying index focuses on attractively valued and financially sound companies with above-average dividend yields. Those are compelling traits because many high dividend companies have financial issues. Those can be precursors to payout cuts or suspensions.
Additionally, some of stocks in the high dividend camp that feature the benefit of strong balance sheets may offer rich valuation. This means that investors have to pay up to access the payout. Another benefit of dividend investing is pertinent to DURA: It can act as a volatility reduction tool within portfolios.
“Dividend-stock funds were ideally positioned to weather the technology stock crash that occurred from 2000 through 2002, as they were only lightly exposed to the sector. While Vanguard Total Stock Market Index lost nearly 44% cumulatively, owing to calamitous losses from its growth stocks, dividend stock funds dropped only one third as far,” noted Morningstar’s John Rekenthaler.
Fast-forward two decades, and more tech companies than ever are dividend-payers. The list is growing. DURA’s 17.52% weight to that sector reflects this — it’s the ETF’s second-largest sector allocation behind healthcare. However, tech dividend-payers, including those residing in DURA, aren’t the financially dubious firms that contributed to the tech bubble bursting. Some of the fund’s tech stocks are shares of companies that are among the most financially sound in corporate America. The VanEck ETF has other benefits.
“The third potential benefit, as previously mentioned, is portfolio diversification. After all, as Dr. Harry Markowitz taught us, investment contributions should be measured in context, not isolation. If dividend stocks behaved differently from other securities, thereby providing the portfolio with what other investments cannot, they would deserve inclusion,” concluded Rekenthaler.
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