The Fed’s shift to a patient approach on interest rates after lifting rates for three years has returned the lure for dividend investing this year. This is because higher interest rates took the sheen away from dividend investing, pushing bond yields higher and making them attractive. Now, with lower interest rates, the appeal for dividend stocks is on the rise once again.
Though these stocks don’t offer much price appreciation in the rising stock market, they offer steady stream of income along with the potential of capital gains. Dividend-focused products offer safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices.
Dividend paying securities are the major sources of consistent income for investors to create wealth when returns from the equity market are at risk. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis (read: Top-Ranked ETF Winners in Dow's Longest Rally in 24 Years).
Further, research shows that dividend stocks often outperform their non-dividend paying counterparts over longer periods. According to Chicago-based Greenrock Research, a portfolio with the top 20% of the S&P 500 companies ranked by dividend yield and weighted by market capitalization, outperformed the overall S&P 500 by 2.13 percentage points annually from 1995 to 2018.
In particular, stocks having a history of dividend growth lead to a healthy portfolio when compared to simple dividend paying stocks or those with high yields. Although these stocks do not necessarily have the highest yields, they have outperformed for a longer period than the broader stock market or any other dividend-paying stocks.
That being said, we highlight five dividend ETFs that have generated strong returns this year but might be overlooked by investors given their lower AUM. These products seem to be compelling picks given renewed demand for dividend investing (read: 4 Best-Performing Sector ETFs of February):
First Trust SMID Cap Rising Dividend Achievers ETF (SDVY - Free Report) – Up 18.2%
This fund offers exposure to 100 small and mid-cap companies with a history of raising their dividends and exhibits the characteristics to continue to do so in the future by tracking the NASDAQ US Small Mid Cap Rising Dividend Achievers Index. From a sector look, industrials take the top spot at 32.8%, followed by financials and consumer discretionary with double-digit allocation each. The ETF charges 60 bps and has accumulated $4.1 million in its asset base. It has a Zacks ETF Rank #3 (Hold).
WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS - Free Report) – Up 16.3%
This fund provides exposure to dividend-paying small-cap companies with growth characteristics in the U.S. equity market. It follows the WisdomTree U.S. SmallCap Quality Dividend Growth Index, charging investors 38 bps in annual fees. Industrials takes the top spot at 26% while consumer discretionary, financials, and materials round off the next three spots. The product has amassed $123.5 million in its asset base and has a Zacks ETF Rank #3 (read: 5 Small-Cap ETFs & Stocks Beating Russell 2000).
Global X S&P 500 Quality Dividend ETF (QDIV - Free Report) – Up 15.7%
This fund invests in U.S. equity securities included in the S&P 500 Index that rank within the top 200 of the index’s universe by both quality score and dividend yield. It follows the S&P 500 Quality High Dividend Index, charging investors 35 bps in annual fees. Here, consumer discretionary is the top sector, followed by financials (20.2%), technology (13.4%) and energy (11.6%). The ETF has AUM of $6.3 million.
WisdomTree U.S. SmallCap Dividend Fund (DES - Free Report) – Up 14.9%
This ETF offers exposure to the dividend-paying small-cap companies in the U.S. equity market by tracking the WisdomTree U.S. SmallCap Dividend Index. It holds 725 securities in its basket and charges 38 bps in annual fees. Industrials, consumer discretionary, real estate and financials are the top four sectors accounting for a double-digit exposure each. DES has amassed $2.1 billion in its asset base and has a Zacks ETF Rank #3 with a Medium risk outlook.
First Trust Dorsey Wright Momentum & Dividend ETF (DDIV - Free Report) – Up 14.5%
This fund follows the Dorsey Wright Momentum Plus Dividend Yield Index, which measures the performance of the 50 stocks with the highest dividend yield comprising the NASDAQ US Large Mid Index that still maintain high levels of relative strength. Holding 51 securities in its basket, it has AUM of $29.6 million and expense ratio of 0.60%. About half of the portfolio is dominated by financials while utilities takes the second spot with double-digit exposure (read: U.S. Government Reopens: Tap High Beta & Momentum ETFs).
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