Though U.S. stocks logged in the first weekly gains in a month after a tumultuous ride buoyed up by an incredible rebound in oil price and hopes of additional stimulus in Europe and Japan, a long list of worries kept the stock market returns at risk.
This is especially true given the weak international fundamentals, especially in China and its global repercussions that could put a pause on the slowly recovering U.S. economy. Additionally, bleak oil demand/supply trends, weak Q4 corporate earnings, and uncertain timing of the next rate hike are making investors cautious. Notably, corporate profits seem to be in recession with fourth-quarter earnings expected to decline 6.6% as per the Zacks Earnings Trends. This would mark the third consecutive quarter of decline in earnings.
Accounting for the weekly gain, the major benchmarks were down 6.5% or more from a year-to-date look and are still in the correction territory having lost more than 10% from their 52-week high price. As per BMO Capital, "the S&P 500 is currently on pace to record its worst monthly decline since January 2009 and 11th worst month during the post war era."
This sluggish backdrop has rekindled investors' faith in products that provide stability and safety in a rocky market. Nothing seems a better strategy than picking quality dividend stocks in this sort of an environment.
Why Quality Dividend?
Quality dividend stocks offer safety and stability in a choppy stock market as they ensure regular income to investors in the form of dividends. At the same time, they also have the potential for capital appreciation when the market is on an upswing. Investors should note that these stocks are mature companies, which are less volatile to the large swings in the stock prices, and therefore are well protected than others in a tumbling market, which we have seen several times this year.
In a nutshell, quality dividend stocks have a long track of profitability, history of raising dividend year over year with prospects of further increases, good liquidity, and some value characteristics. As a result, a basket of quality dividend stocks offer dividend growth opportunities when compared to other products in the space but might not necessarily have the highest yields.
These products provide a nice combination of dividend growth and capital appreciation opportunity and are mainly suitable for the risk-averse, long-term investors. For them, we have highlighted some ETFs that could be excellent choices irrespective of the stock market directions.
FlexShares Quality Dividend Index ETF (NYSEARCA:QDF)
This fund uses a proprietary model that includes factors like profitability, solid management and reliable cash flow. Then, the firms are selected based on expected dividend payments, resulting in a basket of 185 securities. The product is widely diversified across components with none of the securities holding more than 3.6% of assets. Further, it is well spread out across sectors with financials taking the top spot at 17.5% followed by information technology (16.8%), consumer discretionary (14.3%) and healthcare (11.9%). The fund has amassed $672.4 million in its asset base and trades in a moderate volume of nearly 71,000 shares. It charges 37 bps in fees per year and pays a dividend yield of 3.24% annually. The fund is down 6.2% in the year-to-date time frame.
Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD)
With an AUM of $2.9 billion, this product offers exposure to the 111 high dividend-yielding U.S. companies that have a record of consistent dividend payments supported by fundamental strength based on financial ratios and ample liquidity. This can be easily done by tracking the Dow Jones U.S. Dividend 100 Index. The fund is well spread across single security with none holding more than 4.8% of assets. However, it is slightly tilted toward the consumer staples sector with 23% share while information technology, industrials, healthcare and energy rounded off the top five. The fund trades in solid volume of more than 667,000 shares a day and is one of the low-cost choices in the dividend space, charging 7 bps in fees per year. The ETF has shed about 5.1% so far this year and yields 3.13% in annual dividends.
WisdomTree LargeCap Dividend ETF (NYSEARCA:DLN)
This ETF tracks the WisdomTree LargeCap Dividend Index, which is dividend weighted annually to reflect the proportional share of cash dividend that each company is expected to pay in the coming year. The fund has been able to manage assets of $1.6 billion and trades in good volume of 105,000 shares a day on average. Expense ratio came in at 0.28%. Holding 298 stocks in its basket, the product is widely diversified across each component as none of these hold more than 3.5% of assets. Sector-wise, it also has spread-out exposure with none of the sector making up for more than 15.4% share. The fund has an annual dividend yield of 2.96% and has lost 5.5% so far this year.
ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA:NOBL)
This product provides exposure to 51 companies that raised dividend payments annually for at least 25 years by tracking the S&P 500 Dividend Aristocrats. It is widely diversified across various securities as each account for less than 3% share. From a sector look, more than one-fourth of the portfolio is dominated by consumer staples, followed by healthcare (15.2%), industrials (14.9%), consumer discretionary (12.1%), and financials (11.6%). The fund has an impressive level of AUM of $984.1 million and has an annual dividend yield of 2.13%. Expense ratio is 0.35% while average daily volume is good at 177,000 shares. NOBL has lost 5.3% so far this year.
WisdomTree U.S. Dividend Growth ETF (NASDAQ:DGRW)
This fund tracks the WisdomTree U.S. Quality Dividend Growth Index and offers diversified exposure to U.S. dividend-paying stocks with both growth and quality characteristics like long-term earnings growth expectations, and three-year historical averages for return on equity and return on assets. It has gathered $594.5 million in its asset base and trades in good volume of nearly 171,000 shares per day. The ETF charges 28 bps in fees per year from investors and holds 296 securities in its basket, with each holding less than 4.3% share. From a sector look, it provides double-digit allocation to consumer discretionary, information technology, industrials, consumer staples, and healthcare. The fund has lost 5.9% in the year-to-date time frame.
First Trust NASDAQ Rising Dividend Achievers ETF (NASDAQ:RDVY)
This fund provides exposure to 50 U.S. stocks with a history of rising dividends and that are expected to continue doing so in the future. In addition, it also screens for stocks with rising earnings per share and cash-to-debt ratio greater than 50%. This can be done by tracking the NASDAQ Rising Dividend Achievers Index. All the securities are well spread out with each accounting for less than 2.2% of total assets. However, the product has a certain tilt toward financials with 27.6% share, closely followed by information technology (23.6%). The ETF has accumulated $36.2 million in its asset base and sees a paltry volume of 20,000 shares a day on average. Expense ratio came in at 0.50%. The fund has shed 8.5% so far this year.