Exchange traded fund investors should look to companies with a history of growing dividend payouts as their ability to endure in challenging markets may make dividend growth strategies advantageous in today’s environment.
In the recent webcast, The Dividend Growth Advantage: Strategies for Today’s Markets, Craig Lazzara, Managing Director, Global Head of Index Investment Strategy, S&P Dow Jones Indices, pointed out that since 1936, reinvested dividends have contributed 38% of the total equity return of the S&P 500.
“Sustainable dividend income has been an important factor in total equity returns,” Lazzara said.
Simeon Hyman, Global Investment Strategist, ProShares, also pointed out that dividend-growing companies are also high quality names. He pointed out that a company’s credit rating provides a convenient composite measure of quality. Only one-fifth as many dividend cutters and eliminators have come from the top quintile of the S&P 500 by credit rating, while nearly five times that number have come from the bottom quintile.
A similar picture appears when sorting by dividend yield: companies in the highest quintile of dividend yield – those whose ability to pay may become stretched in challenging markets – account for more than double the number of dividend cuts and eliminations versus those in the bottom quintile with more modest dividend yields.
“The highest-quality companies have, however, proven their ability to grow their dividends over time. And they have demonstrated an ability to survive through a range of market environments, even raising dividends after previous recessions,” Hyman said.
Steady dividend payouts have also helped produce improved risked-adjusted returns over time.
“Since its inception in 2005, the S&P 500 Dividend Aristocrats Index has outperformed the S&P 500 by a significant margin—with lower volatility,” Kieran Kirwan, Director, Investment Strategy, ProShares, said, referring to the customized index of companies with a track record of consistently growing dividends.
Since its inception in May 2005, the S&P 500 Dividend Aristocrats Index returned 10.11% with 15.79% volatility, compared to the S&P 500 Index’s 8.97% return and 16.62% volatility over the same period.
Investors can gain exposure to these quality dividend payers through the ProShares S&P 500 Aristocrats ETF (NOBL), which tracks the S&P 500 Dividend Aristocrats Index. NOBL is ProShares’ flagship dividend growth ETF strategy that targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. More than half of the companies in the index have over 40 years of consistent dividend growth, and 10 of them have grown dividends for more than half a century.
The improved risk-adjusted returns over time is also found in the smaller segments of the companies with a consistent history of growing dividends. For instance, since its inception in January 2015, the S&P MidCap400 Dividend Aristocrats Index generated a 7.60% return with a 15.99% volatility, compared to the S&P MidCap 400 Index’s 5.55% return and 17.67% volatility. Additionally, since its November 2014 inception, the Russell 2000 Dividend Growth Index generated a 6.12% return with a 17.42% volatility, compared to the Russell 2000’s 5.09% return and 18.96% volatility.
ProShares also offers dividend growth ETFs that focus on other market segments, like the ProShares Russell 2000 Dividend Growers ETF (SMDV) and the ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL) for those seeking quality dividend growers in the small- and mid-cap categories, respectively. The mid-cap Dividend Aristocrats Index, though, only requires 15 consecutive years of increased dividends for inclusion. SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.
Investors can also diversify into international markets while tracking similar dividend growth strategies. For instance, the ProShares MSCI EAFE Dividend Growers ETF (EFAD) tracks developed market Europe, Australasia, and Far East companies that exhibit a minimum dividend increase streak of 10 years.
The ProShares MSCI Europe Dividend Growers ETF (EUDV) tracks the performance of the MSCI Europe Dividend Masters Index, which consists of at least 25 European companies that have consistently increased their dividends for at least ten consecutive years.
The ProShares MSCI Emerging Markets Dividend Growers ETF (EMDV) follows the MSCI Emerging Markets Dividend Masters Index, which targets MSCI Emerging Market components that have increased dividend payments each year for at least seven consecutive years.
Additionally, ProShares more recently added to its burgeoning lineup of dividend growth ETFs with the launches of two funds – the ProShares Russell U.S. Dividend Growers ETF (TMDV) and the ProShares S&P Technology Dividend Aristocrats ETF (TDV).
Financial advisors who are interested in learning more about the benefits of a dividend growth strategy can watch the webcast here on demand.