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A Checklist for Assessing Dividend ETFs (Part 2)

When selecting dividend ETFs, investors should look beyond funds' current yield.

Ben Johnson 25.07.2019

In part one of this article, we looked at the first key characteristics of dividend ETFs -- dividend yield. In this second part, we will discuss the other two key characteristics -- dividend growth and dividend durability.

Dividend Growth
Investors too often look at dividend yields in isolation, without giving dividend growth its due. Dividend growth is a vital component of the overall income equation, as it will determine the extent to which the expansion of an investor’s equity-income stream will lag, keep pace with, or outstrip the rate of inflation. The goal, of course, is to grow this income stream at a rate that exceeds inflation, in order to grow one’s real (that is, inflation-adjusted) income.

Of the 10 dividend-oriented ETFs included in the sample, four of them track a benchmark that specifically screens its investable universe for firms with long track records of paying and/or regularly increasing dividends. Isolating firms with a long track record of paying and increasing dividend payments is a backdoor quality strategy. These companies tend to be less cyclical and more profitable than most and have healthy balance sheets. In Morningstar parlance, they often have economic moats—durable competitive advantages that allow them to earn juicy profits for extended periods. These firms are often well-positioned to increase dividends over time and will, on average, fare better than the market at large during downturns.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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