Low bond yields are forcing fixed income investors to seek other avenues in order to satiate their appetites for yield. One of the options is dividends via equities, which puts forth the opportunity to consider dividend-focused exchange-traded funds (ETFs).
Bond yields nowadays have “virtually nothing to keep their powder dry and earn a bit more than what money-market funds pay,” said Dan Genter, CEO of RNC Genter Capital Management in Los Angeles, via a MarketWatch report.
“Genter said that he and his team select from all stocks listed on U.S. exchanges, with an emphasis on a good history of paying and growing dividends, with no cuts for at least five years,” the report said. “New positions must have dividend yields of at least 2.5%, well supported by free cash flow. A company’s free cash flow is its remaining cash flow after planned capital expenditures, including interest on debt. The remaining free cash flow can be used for dividends, buybacks or other corporate purposes.”
When looking at the broad range of ETF options, one fund to consider is the FlexShares Quality Dividend Index Fund (QDF ). The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Dividend IndexSM.
The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust 1250 Index, a float-adjusted market-capitalization weighted index of U.S. domiciled large- and mid-capitalization companies. Under normal circumstances, the fund will invest at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of the index.
Other Dividend ETF Options
The ProShares S&P 500 Aristocrats ETF (NOBL ) tracks the S&P 500 Dividend Aristocrats Index and is ProShares’ flagship dividend growth ETF strategy. The fund targets the best of the best in dividend growth, selecting components that have increased their dividends for at least 25 consecutive years. As a result of this high-quality filter, investors are left with a portfolio of first-rate dividend payers compared to say high-yield focused funds that feature companies in precarious financial positions as a result of over-leveraging.
Additionally, ProShares also offers dividend growth ETFs that focus on other market segments, like the ProShares Russell 2000 Dividend Growers ETF (SMDV ) and the ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL ) for those seeking quality dividend growers in the small- and mid-cap categories. REGL tracks a Dividend Aristocrats Index, which only requires 15 consecutive years of increased dividends for inclusion.
On the other hand, SMDV, which tracks the Russell 2000, the benchmark U.S. small-cap index, uses the Russell 2000 Dividend Growth Index. This index includes small-cap firms with dividend increase streaks of at least a decade.