This year, dividend stocks and related ETFs have been overshadowed by more glamorous growth fare. This is the result of investors’ devotion to the artificial intelligence (AI) theme. However, the Federal Reserve’s September interest rate cut and the specter of elevated post-election volatility could bolster the case for dividends.
Up 6.20% over the past 90 days, the ALPS O’Shares U.S. Quality Dividend ETF (OUSA ) could be a payout fund to consider. It’s not just OUSA’s recent bullishness that makes the ETF appealing in the current environment. Rather, its combination of favorable volatility traits and steady payout growers could make the fund a compelling option for equity income investors against the backdrop of a potential change in scenery in Washington, D.C. and amid the possibility of a slowing economy.
OUSA could be all the more attractive should the Fed continue paring borrowing costs. As Treasury yields decline, some income investors are inclined to take on more credit or duration risk in the bond market in search of yield. While OUSA isn’t a high yield instrument, it offers more upside potential than most bond funds and does so with avenues for mitigating volatility.
OUSA Has Impressive Credentials
There are multiple reasons dividend ETFs such as OUSA could be interesting ideas for bond investors going forward.
“Dividend ETFs, specifically those oriented toward income, solve two problems facing bond investors: inconsistent long-term yields and low growth of principal,” noted Morningstar analyst Daniel Sotiroff. “Like bonds, well-constructed dividend ETFs that adequately control their risks can provide fairly consistent payouts. The stocks underpinning these ETFs can grow and become more valuable over time. Such growth can lead to higher dividend payouts if yields remain steady. And those payouts aren’t subject to change with central bank policy rates. On the contrary, profitable and well-managed companies typically loathe cutting dividends.”
Another perk associated with OUSA is that its dividend yield is just 1.51%. On the surface, that not might sound like a credible alternative to high yield bonds, but OUSA’s payout yield confirms the ETF isn’t littered with high dividend companies that may have flimsy balance sheets or could be dividend offenders in the future. Remember, like bond yields, dividend yields often rise as a result of declining prices of the underlying security.
“The deteriorating nature of their underlying stocks means they may not grow at a reasonable rate over the long term. Along those lines, they may be more volatile than the market and subject to deeper drawdowns, which compromises their long-term growth,” added Sotiroff.
Vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for OUSA for which it receives an index licensing fee. However, OUSA is not issued, sponsored, endorsed, or sold by VettaFi. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OUSA.
For more news, information, and analysis, visit the ETF Building Blocks Channel.
