In golf, there’s a saying that “driving is for show and putting is for dough.” Believe it or not, it’s applicable when it comes to dividend investing.
In that instance, yield is the show and dividend growth is the dough, implying big dividend yields often catch investors’ attention while overshadowing the long-term benefits of steady payout growth. In the world of ETFs, income investors can access both flavors with the ALPS O’Shares U.S. Quality Dividend ETF (OUSA ). It ranks as one of the more compelling options in the dependable growth category.
Though not impervious to market pullbacks, dividend growth is proving to be one of this year’s less bad strategies. Specific to OUSA, that ETF is outpacing the S&P 500 by 500 basis points since the start of the year while sporting 1,000 basis points less in terms of annualized volatility. And to its credit, OUSA has topped some of the largest ETFs in both the payout growth and high dividend camps over the past three years.
Dividend ETF OUSA Has Plenty of Perks
History is just that — history — but in dividend investing, it can be instructive. Said another way, companies with track records of boosting payouts have done well for patient investors.
“Finding stocks that have a history of paying dividends over the long term can also be valuable. One way of trying to gauge that is by researching a stock’s payout ratio, which tells you the percentage of earnings that go towards the dividend,” according to Charles Schwab research.
Payout ratio gauges the percentage of net income a company distributes to shareholders in the form of dividends. Firms with elevated payout ratios — though not always — may be signaling that they’re ripe for payout cuts or suspensions. Regarding OUSA, all of that is relevant because the ETF leverages quality as part of its methodology. That could be a sign that many OUSA member firms aren’t burdened by their dividend obligations.
Unlike some rival ETFs, OUSA doesn’t focus on length of dividend increase streaks, but its use of the quality factor can be an indicator of future dividend growth because quality can include elements such as a company’s cash flow and payout ratio. Quality can also be helpful in terms of avoiding heavily indebted companies, which may be dividend offenders down the road.
“Lower debt-to-equity ratios are better because debt burdens can eat into future earnings. However, they can vary depending on the industry. For example, big industrial energy and mining companies tend to carry more debt than other industries. That’s why investors typically compare debt level of companies in the same industry,” concluded Schwab.
For more news, information, and analysis, visit the ETF Building Blocks Channel.
VettaFi LLC (“VettaFi”) is the index administrator and calculation agent for OUSA, for which it receives a fee. However, OUSA is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OUSA.
