Market Pulse: Dividend-paying ETFs
February 21, 2019
Stocks were easy to own in 2016-17 when they went straight up. Then came 2018.
It's harder to hold stocks when they are volatile. One way to make stock ownership easier is to own dividend-paying stocks. Better still, buy dividend growers. Let me explain.
Many stocks pay dividends and several increase them again and again. Only a select few have consistently increased their dividends annually for 25 or more years. Those are called "Dividend Aristocrats" and they capture the upside of bull markets and typically outperform in bear markets.
From May 1, 2005 through Dec. 31, 2018 an index of Dividend Aristocrats captured 92 percent of the S&P 500 advances but only 75 percent of the declines.
We can see that in recent performance. From Oct. 1 through year-end the S&P 500 fell 13.5 percent. An index of the Dividend Aristocrats in the S&P 500 lost a more manageable 8.6 percent. This year the S&P 500 is up 9.9 percent and the Dividend Aristocrats have advanced 8.8 percent.
Why the better risk-to-reward performance? 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.
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S&P 500 Dividend Aristocrats are typically successful and profitable. Examples are Lowe's, Stanley Black & Decker, Coca-Cola, Exxon Mobil, etc. What isn't included? Pot stocks, semiconductor stocks, and other hyped sectors that rise fast and fall faster.
The easiest way to own the S&P 500 Dividend Aristocrats is to buy the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). It yields 2.75 percent and its expense ratio is 0.35 percent.
A lower cost ETF of dividend growers is Vanguard Dividend Appreciation (VIG). VIG's holdings aren't limited to S&P 500 stocks so it has a larger portfolio and its expense ratio is only 0.08 percent.
While I hold both of these ETFs, I own some of the individual stocks as well. My favorites have a good record of increasing their dividends and include Merck (MRK), Pfizer (PFE), Enbridge (ENB), and Becton Dickinson (BDX),
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 such portfolios.
A portfolio should also include exchange-traded debt and preferred stocks. I've written about those many times in this column, and they continue to 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.