With 10-year Treasury yields inching closer to 5%, some investors may be pondering the point of embracing dividend stocks when there’s perceived lower risk available with U.S. government debt.
Then again, rising yields mean declining prices, confirming that even Treasurys aren’t as risk-free as they used to be. With bonds not being the refuge they once were, income investors shouldn’t be dismissive of dividend stocks and related exchange traded funds.
The proof is in the proverbial pudding. Take the case of the VanEck Morningstar Durable Dividend ETF (DURA). The fund, which follows the Morningstar US Dividend Valuation Index, isn’t setting the world on fire this year, but its year-to-date loss is half as bad as that of the widely followed IDC US Treasury 20+ Year Index. In other words, while dividend stocks haven’t been perfect this year, DURA has been a better bet than long-dated Treasurys.
Dividend ETF DURA Has Catalysts
As noted above, 10-year yields are inching perilously closer to 5%, potentially diminishing the allure of DURA’s 30-day SEC yield of 3.38%. Still, investors shouldn’t write off the ETF, because it’s home to an array of high-quality dividend payers. One such example is PepsiCo (NASDAQ: PEP).
“Pepsi notched good results in the most recent quarter thanks to snack and beverage innovations, its flexible channel strategy, and efficiency gains, notes Morningstar analyst Dan Su. We think Pepsi stock is worth $180, and shares trade below that. Pepsi has raised its dividend for 51 consecutive years, and we expect dividend payments to grow at 8% annually over the next decade, says Su,” noted Morningstar’s Susan Dziubinski.
Including Pepsi, consumer staples stocks represent 20.30% of the DURA roster ,and several other names from that sector are among Morningstar’s top dividend stock ideas. However, DURA has more to offer investors beyond staples stocks.
For example, the ETF allocates nearly 23% of its roster to healthcare stocks. That sector currently offers both quality and value traits, and is home to some venerable dividend payers, including DURA holding Bristol-Myers Squibb (NYSE: BMY).
“The company has built a strong portfolio of drugs and a robust pipeline through adept acquisitions, explains Morningstar director Damien Conover. Its lineup of patent-protected drugs, entrenched salesforce, and economies of scale underpin its Morningstar Economic Moat Rating of wide,” added Dziubinski. “While the firm’s 30% payout ratio rests below the industry average of 50%, we think the level is actually about right, as upcoming patent losses will drive the payout ratio closer to average over the next five years, concludes Conover.”
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