As the Federal Reserve lifts Covid-19 dividend and share buyback restrictions on the financial sector, dividend-related exchange traded funds could benefit from the increased capital distributions ahead.
After its annual stress test on Thursday, the Fed found that all 23 of the tested banks appeared to have “strong capital levels” and would be able to withstand a severe recession, Yahoo! Finance reports.
The Fed imposed restrictions on the amount that large banks could payout to shareholders through dividends and shareholders as a way to cushion any potential bad loans during the coronavirus pandemic. The central bank previously stated that these restrictions would be lifted if banks met regulatory minimums in their stress tests.
Since they are now capitalized above the regulator’s requirements, the largest banks will no longer need to follow the restrictions on share buybacks and dividends after June 30.
Federal Reserve Vice Chairman for Supervision Randal Quarles said that the banking system looks “strongly positioned to support the ongoing recovery.”
“We think banks will be allowed to return twice as much capital this year as opposed to the prior year,” Mike Mayo, a senior analyst at Wells Fargo, told Yahoo! Finance.
To gain exposure to the dividend theme, investors can consider a dividend exchange traded fund strategy that targets both strong fundamentals and dividend growth over time. The SmartETFs Dividend Builder ETF (DIVS) is an actively managed dividend growth strategy that seeks dividend-paying companies that have provided an inflation-adjusted cash flow return on investment of at least 10% in each of the last 10 years. The ETF invests in approximately 35 dividend-paying companies globally.
SmartETFs argues that dividend strategies focusing on high dividends and a history of dividends are flawed since they often fail to identify which factors are generating those dividends. When building the DIVS portfolio, portfolio managers perform a detailed review to seek persistent cash flow or companies with a real cash flow on investment of at least 10% on capital for each of the last 10 years. Companies have sound balance sheets or low levels of debt. Additionally, the portfolio managers target value, purchasing shares at a time when target companies are trading at the low end of their peers, the low end of their history, and low end of their industry.
This article originally appeared on ETFTrends.com.