Over long horizons, dividends’ growth and reinvestment of those payouts serve as vital factors in portfolio growth. However, dividends aren’t guaranteed and with bond yields still high, some skittish investors may be inclined to embrace fixed income over equity income.
That could be a mistake because the latter is more conducive to long-term capital appreciation. Fortunately, there are avenues through which investors can forecast dependable dividend growth. The VanEck Morningstar Durable Dividend ETF (DURA ) merits a place in the conversation because the exchange traded fund focuses on attractively valued dividends stock with the potential to steadily raise payouts.
The ETF, which turns six years old in October, sports a 30-day SEC yield of 3.37%. That’s not jaw-dropping, particularly when measured against a slew of intermediate-term and long-duration bond ETFs, but it implies room for long-term payout growth.
Why DURA’s Methodology Matters
By focusing on dividend growth rather than seductive yields, DURA can steer investors away from potential offenders. That’s just one point in the ETF’s favor. Another reason that DURA’s methodology matters is that corporate profits as a percentage of GDP currently reside at record highs, which could signal limited payout growth opportunities from some companies.
“For starters, the market’s gloomy expectations regarding future growth in dividend payments might have some justification. For starters, corporate earnings are near a record high as a percentage of GDP. Those earnings have varied from 6% to 13% of GDP. As of the end of Q3 2023, they stood at close to 12% of GDP,” noted Erik Norland of CME Group.
Currently, CME-offered S&P 500 Annual Dividend Index futures are implying some level of pessimism regarding S&P 500 dividend growth due in large part to the yield curve, which could signal a recession. During the global financial crisis, the last traditional recession to afflict the U.S. economy, S&P 500 payouts declined 20%.
That’s bad news, but there are no guarantees such an ominous scenario will repeat this year. In what could signal opportunity with DURA, a compelling case can be made that CME S&P 500 Annual Dividend Index futures are signaling too much negativity at the moment.
“That said, there is also an argument that S&P 500 Annual Dividend Index futures might be too pessimistic. They missed the rise in dividend payments last year. Moreover, as our previous research has shown, dividend payments rose substantially during the high inflation period of the 1970s, well outperforming the equity market, observed Norland.
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