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A Dependable Dividend ETF

Although the Federal Reserve is nearing a June interest rate hike, that move may not hinder dividend stocks and exchange traded funds as much as some income investors think. Additionally, dividend growth stocks could prove particularly sturdy in the event of an interest rate increase.

Stocks with steady dividend yields reassure investors of a company's strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment's overall return.

Related: Low U.S. Interest Rates Boost International Dividend ETFs

TheSPDR S&P Dividend ETF (NYSEArca: SDY ) is one ETF that specializes in dividend growth as it follows a dividend aristocrats index that mandates member firms have minimum dividend increase streaks of 20 years.

Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.

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Companies that have consistently raised dividends also exhibit stable balance sheets and consistent earnings growth. And SDY provides consistent dividend growth via its underlying index, which mandates member firms have dividend increase spanning at least 20 years.

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Company stocks that issue high yields may be masking their distressed books or may not be sustainable and are heading for dividend cuts. On the other hand, these quality dividend ETFs try to limit the impact of these value traps by selecting components based on a history of sustainable dividend growth.

"Due to the recent spate of negative dividend actions from the energy patch, that sector is lightly represented in SDY at a weight of just 3.2%. However, SDY's largest sector weight is 24.2% allocated to financial services," according to InvestorPlace . "That may surprise some dividend investors that remember rampant payout cuts from big banks during the financial crisis, but the bulk of SDY's holdings from that sector are smaller banks and real estate investment trusts."

Dividend growers provide an aspect of quality and growth since these firms have a long track record of raising dividends. Companies that have consistently raised dividends also exhibit stable balance sheets and consistent earnings growth.

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SPDR S&P Dividend ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article was provided by our partner Tom Lydon of etftrends.com.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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