Following a rough first half of 2020, a dividend revival started – one that's still got plenty of momentum. That renaissance arrived none too soon because although 10-year Treasury yields more than doubled over the past six months, yields on government debt and other investment-grade fare are still low.
The combination of low interest rates and resurgent value/cyclical stocks – groups where plenty of dividend payers reside – is efficacious for payout equities. Investors looking to join the party have myriad choices in the world of exchange traded funds, but even with high dividend names tempting, growth is the way to go.
“The Nasdaq Victory Dividend Accelerator Index seeks to create a diversified portfolio of securities which are forecasted to grow dividends. The Index selects 75 securities from the Nasdaq US Large Mid Cap Index based on factors such as dividend growth, liquidity and other financial metrics,” according to Nasdaq.
VSDA: Right Idea Right Now
As noted above, the $343.26 million VSDA is a payout growth strategy, which is relevant because, well, dividends are growing again.
“On a per share basis, S&P 500 Q1 2021 dividend payments for the S&P 500 increased 0.2% to $14.68 from Q4 2020's $14.64 and were down 4.2% from the Q1 2020 record $15.32 payment,” according to S&P Dow Jones Indices. On an aggregate basis, index components paid $123.9 billion in dividends in the quarter, up from $121.6 billion in Q4 2020.”
By nature, dividend investing is a long-term concept. To that end, growth is paramount and it's vital to both younger investors looking to harness the power of compounding and older investors nearing or in retirement that are looking to avoid negative dividend action that damages income streams.
On a related note, many of last year's dividend offenders are resuming payouts – another sign of growth that supports the case for VSDA.
“Companies that suspended their dividends have started to pay again, while others who decreased their dividends or left them unchanged in 2020 have resumed increasing payments," said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. "The dollar amount of dividend increases in U.S. common stocks in Q1 2021 was the largest since Q1 of 2012 as reductions significantly declined in the quarter.”
Right Sector Mix
Whether it's avoiding negative dividend action or sourcing reliable growth, sector allocations matter with dividend ETFs. VSDA has investors covered on that front.
The VictoryShares fund allocates just 5.40% of its combined weight to utilities, energy and real estate names – the latter of two of which were egregious payout offenders in 2020.
On the other hand, VSDA's second-largest sector allocation is 16.32% to financial services – a sector poised for significant payout growth in the back half of this year as the Federal Reserve removes dividend handcuffs from banks.
Likewise, the ETF's 11% technology weight is a point in its favor, too.
“In the first quarter of 2021, companies were 14 times more likely to have positively raised or initiated a dividend than negatively cut or suspended dividend payments. This was nearly triple the ratio from a year earlier,” notes CFRA Research's Todd Rosenbluth, head of ETF & mutual fund research. “Dividend increases were common within the Information Technology sector, and companies such as Analog Devices (ADI) and Applied Materials (AMAT) are among the companies that will further boost cash payments, according to CFRA.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.