The Federal Reserve did what investors were hoping for Wednesday — that is, lowering interest rates. Perhaps it was a case of selling the news or market participants wanting an 0.5% rate cut instead of the 0.25% the Fed delivered, but stocks were drubbed in the final trading day of July.
In cutting rates by 25 basis points, the Fed left the door open for another rate reduction later this year. Right now, it appears likely that another rate cut will indeed happen. Couple that with the $13 trillion in negative yielding bonds around the world and the low-interest-rate environment seen the world over and you have a recipe for increasing the allure of a beloved asset class: dividend stocks.
The amount was not massive, but a handful of dividend exchange-traded funds (ETFs) hit record highs on Wednesday and some data points indicate investors have recently been piling into dividend ETFs, perhaps in anticipation of ongoing declines in Treasury yields.
With the U.S. remaining one of the dominant forces in global dividend growth and with interest rates here declining, investors can mix and match both dividend growth and high dividend ETFs in the current market environment. Here are some of the dividend ETFs that are primed to deliver for investors over the rest of 2019 and beyond.
SPDR S&P Dividend ETF
Expense Ratio: 0.35% per year, or $35 on a $10,000 investment.
The SPDR S&P Dividend ETF (SDY) is one of the dividend ETFs that hit all-time highs on July 31 and one that has recently been luring investors. For the week ending July 30, SDY garnered $1.26 billion in new assets, a total exceeded by just two other ETFs over that period.
The SPDR S&P Dividend ETF is an appropriate fund for this climate because it dances between high dividend and payout growth.
SDY tracks the S&P High Yield Dividend Aristocrats Index. Obviously, that benchmark has “high yield” in its name, but this dividend ETF yields just 2.4%. More importantly, SDY’s 112 components must have dividend increase streaks of 20 years to be included in the fund. While SDY is not necessarily a proper high-dividend ETF, it can provide some leverage to declining interest rates because rate-sensitive sectors such as consumer staples, utilities and real estate combine for nearly a third of the fund’s weight.
SDY is appropriate for a variety of investors, but it might be best deployed by conservative investors looking to reduce portfolio volatility. Over the past three years, SDY is trailing the S&P 500 (.SPX) by a healthy margin, but the dividend ETF has been significantly less volatile and its maximum drawdown over that span was well bellow that of the broader market.
O’Shares FTSE Russell Small Cap Quality Dividend ETF
Expense Ratio: 0.48%
The O’Shares FTSE Russell Small Cap Quality Dividend ETF (OUSM) is an ideal fund for risk-averse investors to tap small-cap stocks, an asset class that data suggest is increasingly fertile territory for dividend seekers.
OUSM tracks the FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index, which “is designed to reflect the performance of publicly-listed small-capitalization dividend-paying issuers in the United States exhibiting high quality, low volatility and high dividend yields,” according to O’Shares.
Interestingly, OUSM is home to nearly 220 stocks, or more than triple the roster of the Russell 2000 Dividend Growth Index (.RUO). Another interesting factoid for investors to consider is this dividend ETF’s return on assets (ROA), a key metric in evaluating payout growth potential. OUSM has an ROA of 8.2% compared to just 0.3% for the Russell 2000 (.RUT). So it’s probably not surprising that the dividend ETF is outperforming the small-cap benchmark over the past year.
Global X SuperDividend U.S. ETF
Expense Ratio: 0.45%
The Global X SuperDividend U.S. ETF (DIV) makes good on the promise of being a “super dividend” play with a trailing 12-month dividend yield of 7.3%, but this dividend ETF is struggling this year with a gain of just 3%. One of the obvious drags on this dividend ETF is energy exposure, be it via master limited partnerships (MLPs) or traditional energy stocks. Those asset classes combine for almost 20% of DIV’s weight, though MLPs, broadly speaking, have been solid this year.
Despite the struggles, this is one dividend ETF that could be poised to bounce back as markets price in expectations of more dovish Fed action. DIV is loaded with rate-sensitive asset classes. That includes mortgage REITs, consumer staples and utilities stocks combining for over 43% of DIV’s roster.
In addition to having a lower beta and lower annualized volatility relative to the S&P 500, this dividend ETF has another perk, particularly for investors looking for regular income.
It pays a monthly dividend.
ProShares MSCI Europe Dividend Growers ETF
Expense Ratio: 0.55%
Remember that $13 trillion in negative-yielding bonds I mentioned earlier? A lot of it resides in Europe, meaning if an investor picks the wrong European bond, he or she will lose money. The ProShares MSCI Europe Dividend Growers ETF (EUDV) is a dividend ETF that is a superior option to most European sovereign debt at the moment.
Developed European economies, namely the U.K. and Switzerland, are among the better dividend growth alternatives to the U.S. This dividend ETF is a play on payout growth as its index requires a minimum dividend increase streak of a decade. In Europe, that’s an exclusive club because EUDV has just 34 holdings and British and Swiss stocks combine for over the fund’s geographic exposure.
About 40% of EUDV’s currency exposure is in euros, a trait that could benefit investors if the European Central Bank (ECB), as is widely expected, unleashes more monetary stimulus. In fact, a case can be made that the ECB has no choice but to unfurl easy monetary policy to lift some slow-moving economies in the Eurozone.
WisdomTree Emerging Markets High Dividend Fund
Expense Ratio: 0.63%
The WisdomTree Emerging Markets High Dividend Fund (DEM) fits the bill as a high-dividend ETF as highlighted by its distribution yield of 4.8%, or more than double the dividend yield on the MSCI Emerging Markets Index (.MXEF). Oh, and this dividend ETF is beating the emerging markets benchmark by nearly 200 basis points this year with lower volatility.
As is to be expected, emerging-markets dividend ETFs look and act much different than U.S. equivalents. Due to the fact that this universe of dividend payers is more fractured than Europe or the U.S., it is reasonable to expect some emerging markets dividend ETFs have geographic concentration risk and that is true of DEM. The WisdomTree fund nearly two-thirds of its weight to Taiwan, China and Russia.
And while DEM is acting less turbulent than the MSCI benchmark this year, the dividend ETF has heavy cyclical exposure with about 54% of its weight allocated to financial, energy and materials stocks. Among other traits, one in favor of DEM is the potential for a swath of interest rate cuts across developing economies, such as the one unveiled by Brazil on Wednesday.
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