A Strategy For Durable Dividend Investing

Oct. 18, 2021 10:47 AM ETDURA
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Summary

  • Selecting companies based on their history of paying is backward-looking and doesn’t account for their future prospects.
  • Consideration of fair value may allow for a portfolio of better valuations and greater upside potential while maintaining an attractive dividend yield.
  • Selecting companies with the lowest probability of default helps reduce the probability of future dividend cuts.

Flowchart on a chalk board

courtneyk/E+ via Getty Images

Approach dividend investing from a position of strength. Chasing the highest-yielding stocks can lead investors to “dividend traps” and companies unable to sustain payouts. Selecting companies based on their history of paying is backward-looking and doesn’t account for their future prospects.

Beyond selecting companies with a high dividend yield, forward-looking assessments of a company’s current valuation and financial health are key components to the long-term durability of dividend pay-outs and growth potential.

High Dividend Yield Potential at a Better Value

Morningstar’s estimate of a company’s intrinsic value, their Fair Value estimate, incorporates an assessment of the company’s economic moat and a projection of the sustainability of its profit potential over time. Consideration of fair value may allow for a portfolio of better valuations and greater upside potential while maintaining an attractive dividend yield.

Yield at a Better Value

One-Year Average as of 6/30/2021

Yield at a Better Value

Source: Morningstar. Index performance is not representative of fund performance. For fund performance current to the most recent month end, visit vaneck.com. For illustrative purposes only. Past performance is no guarantee of future results.

Reduce Potential Dividend Cuts

Distance to Default, Morningstar’s measure of financial health and gauge of future distress, reflects a firm’s likelihood of bankruptcy and has historically been an effective predictor of dividend cuts. Selecting companies with the lowest probability of default helps reduce the probability of future dividend cuts.

Higher Distance to Default Scores Resulted in Fewer Dividend Cuts

Nov. 2015 – Nov. 2019

Higher Distance to Default Scores Resulted in Fewer Dividend Cuts

Source: Morningstar. U.S. companies in the Morningstar Global Markets Index were assigned to quartiles at the beginning of the period based on the likelihood of default using Morningstar’s Distance to Default scoring system. Those companies with the highest likelihood of default ("Very Low" Distance to Default scores) had the highest occurrence of subsequent dividend cuts. The inverse is also true. For illustrative purposes only. Past performance is no guarantee of future results.

VanEck Morningstar Durable Dividend ETF (DURA) seeks to replicate as closely as possible the Morningstar® US Dividend Valuation IndexSM, which is intended to track the overall performance of high dividend-yielding U.S. companies with strong financial health and attractive valuations according to Morningstar.

Important Disclosures

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

Morningstar® US Market IndexSM covers the top 97% of market capitalization of the U.S. equity markets.

Morningstar® US Dividend Valuation IndexSM is designed to provide exposure to securities in the Morningstar US Market Index that have high dividend yield, strong financial health, and attractive uncertainty-adjusted valuation.

Morningstar® US Dividend Composite IndexSM is a broad benchmark that consists of securities that pay qualified income, screened for dividend consistency and sustainability.

The Morningstar® US Dividend Valuation IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Durable Dividend ETF and bears no liability with respect to the ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar US Dividend Valuation Index are service marks of Morningstar, Inc.

The information herein represents the opinion of the author(s), but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. VanEck does not guarantee the accuracy of third party data. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Any indices listed are unmanaged indices and include the reinvestment of all dividends but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. An index's performance is not illustrative of a fund's performance. Indices are not securities in which investments can be made.

An investment in the Fund may be subject to risks which include, among others, investing in equities securities, dividend paying securities, consumer staples, health care, industrials, and utilities sectors, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

Van Eck Securities Corporation, Distributor, 666 Third Avenue, New York, NY 10017

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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