Income investors have been dealt some rough hands recently. Yields on government bonds are so low that the allure of that asset class is significantly diminished. Likewise, credit spreads – the compensation investors receive for embracing bond risk in excess of Treasuries – are depressed, meaning investors aren’t being adequately rewarded in yield terms for taking on the risks associated with corporate bonds.
However, there is some silver lining in the otherwise bleak 2021 income scenario: Dividends growing and are doing so on a global basis. Add to that, there’s still plenty of room for payouts to rise to get back to the highs seen prior to the coronavirus.
“The global total of $471.7bn was boosted by delayed 2020 dividend payments returning to their normal timetable, but also by higher special dividends and positive exchange-rate effects. Underlying growth was 11.2%,” according to Janus Henderson.
With those favorable factors in mind, here some dividend ETFs ideally suited for the current environment and for the long haul.
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
DGRW is ideally suited for the current climate for a couple of reasons. First, with the economic cycle advancing, there are emerging signs market participants are moving on from junkier cyclical stocks to embrace quality fare.
Second, as highlighted by Microsoft’s (MSFT) massive dividend hike announced earlier this week, the technology sector continues its ascent in the dividend landscape. That’s DGRW’s largest sector exposure at almost 27%, which is well above-average among competing dividend ETFs. Moreover, DGRW is heavy on stocks with payout growth potential and light on possible dividend offenders.
“Great dividend-income strategies take steps to control their exposure to firms whose dividends might be at risk,” says Morningstar analyst Daniel Sotiroff. “It’s a careful compromise between two competing forces, balancing yield with financial stability. Often the best portfolios land somewhere in the middle. They don’t have the highest yields, nor do they strictly focus on the highest-quality stocks.”
First Trust NASDAQ Technology Dividend Index Fund (TDIV)
Speaking of tech payouts, TDIV is the first and still the largest dividend ETF focusing on that theme. TDIV tracks the NASDAQ Technology Dividend Index.
That benchmark’s methodology is highly relevant to investors because it has its own elements of quality, including the exclusion of recent dividend cutters, the requirement that all index members must have delivered a dividend in the past year and minimum yield mandate of at least 0.5%, which is decent in the tech universe.
Importantly, TDIV directly taps into the theme of tech dividend growth, which is likely to prove sustainable for years to come.
“The S&P 500 dividend yield at the end of March 2021 was 1.5%, in line with a year earlier but down from 1.9% two years earlier,” says CFRA Research’s Todd Rosenbluth, head of ETF & mutual fund research. “Throughout this period, Information Technology stocks sported below average yields on average, with the recent 1.0% yield down from 1.3% two years earlier. Yet at the end of the first quarter of 2021, 59% of Information Technology stocks in the S&P 500 paid a dividend. While this is lower than 76% for the broader index, the percentage was higher than the 49% for the fellow growth-oriented Consumer Discretionary sector.”
VictoryShares Dividend Accelerator ETF (VSDA)
VSDA tracks the Nasdaq Victory Dividend Accelerator Index (NQVDIV), providing investors with a fresh view of payout growth.
“The Nasdaq Victory Dividend Accelerator Index seeks to create a diversified portfolio of securities which are forecasted to grow dividends. The Index selects 75 securities from the Nasdaq US Large Mid Cap Index based on factors such as dividend growth, liquidity and other financial metrics,” according to Nasdaq.
VSDA offers investors some level of protection by way of light allocations to capital-intensive sectors where some companies can be burdened by dividend obligations, including energy, real estate and utilities. VSDA yields just 1.46%, slightly above the S&P 500, but certainly low to imply a long runway for payout growth going forward.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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