In terms of what’s working among equities this year, the pickings are slim, but dividends stocks and exchange traded funds are, at the very least, performing less poorly than the broader market. Add to that, many dividend-payers are displaying less volatility than broader benchmarks, confirming there’s plenty of utility with this asset class. That could be a sign that an ETF such as the Franklin U.S. Core Dividend Tilt Index ETF (UDIV) is an appropriate consideration for this environment and beyond.
Focusing on the long term, which is relevant when it comes to dividend investing, UDIV is a pertinent idea for a broad swath of investors because it allows market participants to effectively reinvest dividends while removing the need to select individual dividend growth stocks.
“Dividends, when reinvested, can significantly boost total returns over time, making dividend-paying stocks an attractive option for older and younger investors alike,” according to Charles Schwab research. “For example, if you invested $1,000 in a hypothetical investment that tracked the S&P 500® Index on January 1, 1990, but didn’t reinvest the dividends, your investment would have been worth $11,687 as of September 2022. If you had reinvested the dividends, you would have ended up with just over $20,000—nearly double.”
Of course, dividend growth is the lubricant of the engine of dividend reinvesting, and UDIV is more than adequately levered to the theme of payout growth. UDIV, which follows the Morningstar US Dividend Enhanced Select Index, holds 319 stocks. Of that group, more than 43% hail from either the technology and healthcare sectors — two of the best sources of S&P 500 payout growth over the past decade.
Those sector exposures also underscore UDIV’s quality purview. Quality is imperative when assessing dividend stocks because traits such as balance sheet strength, credit quality and management commitment are windows into a firm’s ability to sustain and grow payouts.
Dividend growth is beneficial to investors for other reasons. Those include volatility reducing properties and the potential for long-term outperformance.
“Generally speaking, you want to find companies that not only pay steady dividends but also increase them at regular intervals—say, once per year over the past three, five, or even 10 years. Indeed, companies that grow their dividends tend to outperform their peers over time,” added Schwab. “Over the past 40 years, stocks that maintained or grew their dividends outperformed those that cut their payouts or offered none at all.”
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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.