Income investors are often conditioned to believe that high dividend sectors, such as real estate and utilities, are vulnerable when the Federal Reserve raises interest rates. Indeed, since the start of 2017, those sectors have been laggards.
The Federal Reserve has boosted interest rates four times since the start of 2017, including its most recent rate hike in March. Since the start of last year through April 17th, the MSCI US Real Estate Index is down 3.30% while the Utilities Select Sector Index is up 9.50%. The S&P 500 is higher by more than 22 percent over that span.
Jittery dividend investors may be considering a move to dividend growth strategies away from high-yield fare, but there is a trade-off: lack of yield. For example, the Morningstar US Dividend Growth Index, which requires five years of uninterrupted dividend growth1, has a trailing 12-month dividend yield of just 2.17%.
There are, however, avenues for investors to tap dividend growth while having their yield cake and eating it, too.
Steady Dividend Growth
U.S. companies continue boosting payouts at a prodigious pace.
“Within the S&P 500, the average dividend increase during the first quarter was 13.9 percent, up from 10.4 percent during the fourth quarter of 2017 and 10.2 percent a year earlier,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said in a recent note.2
Some data points suggest the second quarter will be rife with positive dividend news.
“IHS Markit is forecasting that quarterly dividends declared by firms in the S&P 500 will top $115 billion in the current calendar quarter, up 2.3 percent from $112.5 billion declared in Q1,” said the research firm. “Of the 404 large-caps that announce quarterly payments, we expect 71 to increase their dividend payments over Q1 levels. We don’t foresee any dividend cuts in Q2, which would mark a second consecutive quarter of wholly positive actions.”3
As of 3/31/2018
Sourcing Dividend Growth
Knowing that dividends are growing is only part of the battle. Being able to identify the sectors positioned for consistent, long-term payout growth is equally as important, if not more so. After all, not dividend funds are highly exposed to the sectors that are driving dividend growth. Financials and technology are expected to be significant contributors to U.S. dividend growth in the coming quarters.
“At an industry level, Financials are expected to account for 23 of the increases worth $670 million in aggregate,” said Markit. “However Q3 is the most significant quarter for dividends in this sector, after the Fed’s comprehensive capital analysis and review (CCAR) guidance. The next largest sector for dividend increases is Technology, with 10 firms expected to announce $658 million worth of increases.”
As of 3/31/2018
Investors looking to marry the dividend growth and yield concepts can consider the ALPS Sector Dividend Dogs ETF (SDOG). While SDOG offers an above-average dividend yield (*3.95% on a 30-day SEC basis at the end of the first quarter), several of the fund’s components have dividend increase streaks that can be measured in decades. That group includes the likes of Coca-Cola Co. (KO) and Exxon Mobil Corp. (XOM), among others.
Additionally, SDOG’s underlying index, the S-Network Sector Dividend Dogs Index, allocated a combined 30.92 percent of its weight to the healthcare, technology and financial services sectors at the end of last year, groups that are expected to drive S&P 500 dividend growth this year.
*Past Performance is not indicative of future results.
1 Source: Morningstar http://global.morningstar.com/us/documents/Indexes/OS_US_Dividend_Growth.pdf
2 Source: CFRA Research April 16, 2018 https://newpublic.cfraresearch.com/
3 Source: IHS Markit April 18, 2018: https://ihsmarkit.com/research-analysis/us-blue-chip-dividends.html
This material must be preceded or accompanied by a prospectus. Please read it carefully before investing.
Standardized performance for the ALPS Sector Dividend Dos ETF (SDOG) can be found here. Current holdings for SDOG can be found here.
ALPS Sector Dividend Dogs ETF Shares are not individually redeemable. Investors buy and sell shares of the ALPS Sector Dividend Dogs ETF a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
S&P 500 – The S&P 500® (Ticker: SPX) is an index of 500 stocks chosen for market size, liquidity and industry grouping among other factors.
MSCI US Real Estate Index – The MSCI US REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs.
Morningstar US Dividend Growth Index – The Morningstar® US Dividend Growth IndexSM is designed to provide exposure to U.S.-based securities with a history of uninterrupted dividend growth.
One may not invest directly in an index.
The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus. *Past Performance is not indicative of future results.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Sector Dividend Dogs ETF (SDOG).
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
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