Dividend Durability on Display

That’s good news for dividend exchange traded funds, including the SmartETFs Dividend Builder ETF (DIVS). Year-to-date, the actively managed DIVS is beating the S&P 500 by 670 basis points, showing that dividend ETFs are, at the very least, doing less badly than the broader market this year. DIVS also serves as a reminder that investors need to be selective when evaluating dividend ETFs.

“Yet the degree of outperformance has varied widely depending on the specific approach. The dividend investing strategies that have shone most brightly are those that hunt for dividend-paying companies that combine healthy balance sheets with hefty yields,” wrote Morningstar analyst Lauren Solberg.

For its part, DIVS yields about 70 basis points more than the S&P 500. While that doesn’t necessarily put the ETF in high dividend territory, some of its components fit that bill. However, one of the points of emphasis with DIVS is quality — a trait that can ensure that a company has not only the ability to service current dividend obligations, but steadily grow payouts over the long term.

“Strategies with the quality focus are seeking profitable firms in position to sustain their dividends over many years, and slashing the companies that are paying dividends today but may not have the wherewithal to keep paying them in the future,” Morningstar analyst Ryan Jackson said. “They’re explicitly looking for clean balance sheets and strong profits: the kinds of things that put them in a position to keep the dividends flowing.”

DIVS’s 2022 outperformance of the S&P 500 is notable on multiple levels. First, the ETF has no direct exposure to the energy sector — the best-performing group on a global basis this year. Second, DIVS is lightly allocated to technology stocks. That’s relevant not only because that group is slumping this year, but also because tech has become an increasingly prominent source of dividend growth in recent years. As such, many dividend growth ETFs are heavily reliant on tech.

“Dividend growth strategies seek companies that have been increasing the size of their dividend payouts per share, and those kinds of companies can often come from the high-flying, fast-growing technology sector,” added Jackson.

While DIVS has some tech exposure, it currently sources the bulk of its payout growth and yield opportunities from the less volatile consumer staples and healthcare sectors.

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