One of the brightest spots in equity markets this year — which have been hard to come by — are dividend stocks. Of course, that extends to dividend exchange traded funds, too.
Broadly speaking, dividend ETFs are beating standard broad market funds with some high-dividend strategies generating S&P 500-thumping returns. While high-dividend funds are rightfully garnering plenty of attention and praise, equity income investors shouldn’t lose sight of the fact that dividends are growing, which is beneficial to an array of related ETFs, including the Franklin U.S. Core Dividend Tilt Index ETF (UDIV).
UDIV tracks the Morningstar US Dividend Enhanced Select Index. That benchmark is home to plenty of stocks that fit the bill as high-dividend fare; many of those names are also reliable payout boosters, indicating that UDIV is a relevant consideration today for income investors.
“When the Federal Reserve shifts from an accommodative to restrictive monetary policy, there is often an initial period of market volatility and uncertainty,” according to Franklin Templeton research. “Dividend growth has been a desirable trait for equities immediately before, during, and after past cycles of less accommodative Fed policy.”
Another reason that UDIV is worthy of consideration in this market environment is that Fed tightening cycles often reveal financially flimsy companies, prompting investors to embrace higher-quality fare. For decades, steadily rising dividends have been viewed as a reliable sign of quality.
“Dividends may offer evidence of financial strength. Historically companies that initiated or increased their dividend have significantly outperformed those that cut or don’t pay a dividend,” added Franklin Templeton.
As UDIV’s issuer notes, high yield dividend stocks aren’t always what they’re cracked up to be. Some of these companies are burdened by their payouts and ultimately end up reducing or suspending dividends. Investors can mitigate such problems by focusing on sectors with enviable histories of payout growth.
UDIV accomplishes that goal for them by allocating nearly 42% of its weight to technology and healthcare stocks. In recent years, those have been two of the most reliable sources of S&P 500 payout growth.
“Dividend paying stocks may help provide risk management during times of heightened market instability or protracted downturns,” concluded Franklin Templeton. “Stocks that have a history of consistently paying dividends provide a base of real return and have historically exhibited a lower risk profile than non-dividend payers.”
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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.