Home etftrends.com Uncovering the Value in Dividend Grower ETFs

Uncovering the Value in Dividend Grower ETFs

While investors wait on the value factor to bounce back, dividend growth strategies, including the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL), could be the better alternative as some market observers see value in dividend growth stocks.

NOBL tracks the S&P 500 Dividend Aristocrats Index, a benchmark that only includes companies that have boosted dividends for 25 consecutive years. Dividend growth strategies, including NOBL, often feature exposure to the quality factor and a recent analysis of NOBL’s underlying index confirms as much.

“Dividend-growth stocks look cheap, according to Goldman Sachs,” reports Daren Fonda for Barron’s. “Large-cap stocks with expected dividend growth of 10% a year through 2020 trade at 12 times earnings, compared with a P/E ratio of 17 for the S&P 500, which is expected to have dividend growth of 6% on an annualized basis. Stocks in Goldman’s dividend-growth basket yield an average 3.5%, well above the market’s 2% yield.”

A Quality Idea

While dividend growth can be seen as a standalone factor, it is also a sign of the quality factor. The quality factor is a point of emphasis for a growing number of strategic beta exchange traded funds. Though there has been debate surrounding defining quality as it pertains to factor-based investing, quality companies and dividend-paying stocks often go hand-in-hand because those dividends are seen as signs of stable earnings and thoughtful management.

“Dividend growth is considered a stock ‘factor or attribute,” according to Barron’s. “It can be a proxy for quality since companies with dividend growth tend to have relatively high returns on equity and consistent cash flows. Indeed, in Goldman’s framework, dividend-growth stocks have returns on equity of 24%, well above the market average of 19%.”

Dividend ETFs, both dividend growth funds like NOBL or high-yield ETFs, are trailing the S&P 500 this year. However, NOBL is up 13.80% this year, putting the ETF slightly ahead of the high dividend Dow Jones U.S. Select Dividend Index.

“Granted, there is a distinction between high-yield and dividend growth. High-yield sectors such as utilities lack much revenue growth, limiting gains in their shares and their ability to increase dividends. Companies with more growth can hike their dividends at a faster clip, and they offer more potential for price gains,” according to Barron’s.

NOBL allocates just 3.48% of its weight to rate-sensitive real estate and utilities stocks. The fund devotes over 45% of its weight to the industrial and consumer staples sectors.

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