President of VictoryShares and Solutions, Mannik S. Dhillon, spoke with ETF Trends about the dividend growers’ space in 2019, and how to prepare for what’s to come in 2020.
As Dhillon explains, some clients believe the market’s going to continue to climb. In contrast, others believe the market is priced for perfection and want to find ways to add additional quality and defensive strategies, as opposed to continued momentum or cap-weighting.
Funds like the VictoryShares Dividend Accelerator ETF (VSDA), where Victory buys baskets of high-quality dividend growers, has resonated very well. The same can be said for the VictoryShares U.S. Multi-Factor Minimum Volatility ETF (VSMV), as it allows for the potential of better upside capture while minimizing the downside.
Dhillon goes on to point out an example, stating how, “Cap-weighted benchmarks have become so concentrated with the run-up post-2019, and the multiple expansions. So, you have a handful of stocks that are leading the way. Our risk and volatility-weighted approaches have resonated very loudly.”
These have proven to be the areas taking on the most attention at this time. That in mind, it does come down to popularity versus what drives the return. In considering the profiles of the companies factoring into this conversation, they will resonate with investors. But why?
What’s Drawing In Dividend Fans?
As Dhillon explains, “Companies that can grow their dividends year over year have a few things going for them. They have a sound business today. They’re making the right investments to be able to grow their revenues and profits accordingly, so they can increasingly return capital shareholdings. So there’s a bit of a growth element to them, which people still want. But, they’re also not high-flying growth and overvalued growth.”
Putting this next to the backdrop of the idea that these companies are profitable and have little-to-no debt, making them high-quality companies, there will be demand no matter what. Additionally, there’s a profile that comes from compounding the dividends that result in gaining the capital appreciation of the stock, so the total return is attractive.
In terms of how VictoryShares strategy towards dividends differs from other similarly focused funds, Dhillon notes two specific ways. One is the way most competing products use a relatively naive methodology. It follows a pattern of how once a company has grown its dividend for X number of years, they put it in the index. It means merely having a track record of having raised the dividend and then assuming it will just carry forward into the future.
VictoryShares’ opposing line of thinking concerns paying attention to a company’s fundamentals and considering specific characteristics that are consistent across a company’s ability to grow their dividends. With that logic, Dhillon explains how it makes more sense to note those operating on a fundamentals perspective, and only buying the ones with the highest probability to grow their dividend next year.
The second point of differentiation focuses on starting to invest in these companies earlier. As Dhillon states, “The one thing we do very differently is that because we have confidence in that fundamental methodology, we include companies in our universe, after five years of dividend growth.” This kind of effort allows for a differentiated look, a variety in the types of names present in the funds, etc.
This strategy adds up, as anyone can looking into the notable holdings in VSDA and see companies such as Disney (DIS), Target (TGT), and Visa (V); major companies many would not expect. And yet, they are beginning to grow dividends and are clearly an area worth exploring.