Dividends have been the consistent source of income for investors seeking regular returns during both bull and bear markets. According to a study, dividends accounted for an average 52% of the total returns over the past seven decades.
This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis (see: all the Large Cap ETFs here).
Q2 Dividends Payout Hits Record
Overall, the S&P 500 companies declared a record $124 billion in dividend payouts during the second quarter, up 11% from $112 billion in the year-ago quarter. About 89 firms hiked their payouts versus 67 firms a year ago, while 332 have maintained their dividends versus 347 in the same period last year. Notably, 43 companies have retained the ‘aristocrat’ status of 25 years of consecutive dividend raises. This is primarily thanks to a strong economy, solid earnings, historic tax cuts and results from the second round of Federal Reserve stress tests.
Among the special attractions were Citrix Systems (CTXS - Free Report) , which declared a dividend for the first time with a payout of 35 cents, and Dr Pepper Snapple , which announced a special dividend of $103.75 due to merger activity. Lam Research (LRCX - Free Report) , Hewlett Packard Enterprise (HPE - Free Report) , Wynn Resorts (WYNN - Free Report) , Ralph Lauren (RL - Free Report) and Starbucks (SBUX - Free Report) were among the firms that hiked dividend payouts (read: 4 Dividend Growth ETFs to Watch as Global Dividends Top).
The trend is expected to continue in the coming months as most large companies have huge cash piles on their balance sheet and are in a position to increase payouts to shareholders. Additionally, the new tax law encourages the companies to bring their overseas cash back home at much more reduced rates and distribute parts of it to their shareholders. Per Bloomberg, an additional 75 companies will boost dividend payouts this quarter.
Investors should also note that a company which consistently increases its dividend has stronger fundamentals, suggesting rising cash flows, good liquidity and a strong balance sheet.
How to Play
Given this, investors could tap growing dividends in the form of ETFs. Below, we have highlighted five popular dividend ETFs that offer excellent dividend growth potential, any of which could be a solid pick for investor in the long term:
Vanguard Dividend Appreciation ETF (VIG - Free Report)
This is the largest and most popular ETF in the dividend space with AUM of $27.8 billion and average daily volume of about 797,000 shares. The fund follows the NASDAQ US Dividend Achievers Select Index, which is composed of high quality stocks that have a record of raising dividend every year. It holds 182 securities in the basket, with none accounting for more than 4.3% share. The fund charges 8 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Tariff Threats Become Reality, Add 6 ETFs to Your Arsenal).
iShares Select Dividend ETF (DVY - Free Report)
This fund provides exposure to the high dividend-paying U.S. equities with a 5-year history of dividend growth. It follows the Dow Jones U.S. Select Dividend Index and holds 99 securities in its basket with each accounting for less than 2.4% of assets. The ETF has AUM of $17.1 billion and average daily volume of more than 716,000 shares. It charges 39 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.
SPDR S&P Dividend ETF (SDY - Free Report)
With AUM of $15.6 billion and average daily volume of 548,000 shares, this fund provides a well-diversified exposure to 112 U.S. stocks that have been consistently increasing their dividends every year for at least 20 years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. Each firm accounts for less than 2.3% of assets. The fund charges 35 bps in fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
Schwab U.S. Dividend Equity ETF (SCHD - Free Report)
With AUM of $7.5 billion, this product offers exposure to the 105 high-dividend yielding U.S. companies that have a record of consistent dividend payments supported by fundamental strength based on financial ratios and ample liquidity. This can be easily done by tracking the Dow Jones U.S. Dividend 100 Index. The fund is well spread across components, with none holding more than 4.81% of assets. It charges 7 bps in annual fees and trades in solid volume of more than 1 million shares a day. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares Core Dividend Growth ETF (DGRO - Free Report)
This fund provides exposure to companies having a history of consistently growing dividends by tracking the Morningstar US Dividend Growth Index. It holds 455 stocks in its basket with each accounting for less than 3% share. The fund has accumulated $3.7 billion in its asset base and trades in solid volumes of about 684,000 shares. It charges 8 bps in fess per year and has a Zacks ETF Rank #3 with a Medium risk outlook.
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