Market Pulse: Making a case for dividend paying ETFs
In this prolonged low interest rate environment, investors flocked to dividend-paying stocks and understandably so. But those stocks don’t just do well in low-rate environments. If you are saving for retirement, in dividend paying stocks — better still, buy dividend growers. Let me explain.
Ned Davis Research conducted a study on stock returns from 1987 through 2016. They found the annualized return of non-dividend paying stocks was 7.4 percent, while stocks that pay a steady dividend returned 10.1 percent. Better still, stocks that raised their dividend gained 13.8 percent.
In dollar terms, $100 invested in the S&P 500 in 1972 grew to $1,622 in 2012. If you had invested in dividend growing stocks, the $100 would have grown to $4,169.
Why does this happen? Companies that pay dividends typically have profits year after year. Ones that increase their dividend every year must be companies that are doing so well that they have increasingly higher profits to pass on to investors.
But what if you buy at a top? The downside volatility for companies that increase dividends every year is less than other stocks. The 15 worst months for the S&P 500 had an average loss of 7.6 percent. During those months, an index of dividend payers lost 5.6 percent.
There are many Exchange Trade Funds (ETFs) that focus on dividend payers. My favorite is Schwab Dividend Equity (SCHD), which has an amazingly low fee of only 0.07 percent.
The ProShares ETF family offers both domestic and international ETFs that hold dividend growers. Their S&P 500 Dividend Aristocrats ETF (NOBL) invests in S&P 500 companies that have increased their dividend every year for at least 25 years.
Their Mid-Cap Dividend Aristocrat ETF (REGL) holds mid-sized companies that have increased their dividend every year for at least 15 years. Whereas consumer staples is the largest sector holding in NOBL, the financial sector has the largest weighting (nearly 30 percent) in the REGL portfolio. A lower cost ETF of dividend growers is Vanguard Dividend Appreciation (VIG). VIG’s expense ratio is only 0.08 percent.
Owning dividend-paying stocks can be an important portfolio component for investors seeking income. Keep in mind that dividend-paying equities are only one component of a portfolio invested for income, however. A portfolio should also include exchange-traded debt and preferred stocks. I’ve written about those many times in this column, and they play a key role in most of my client accounts.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.