ContactPlanting the Active ETF Seed with Dividend Growth
September 14, 2023
Finding Your Roots
As investors widen their purview to include active ETFs, some may wonder – where do I begin? In our view, the dividend growth category’s combination of income potential and capital growth affords investing confidence across a variety of global market environments, making it a great place to start in active ETFs.
Potential Benefits of Dividend Growth Investing
| Income GenerationDividend growth strategies focus on companies with sustainable and growing dividends. For investors, this means growing income potential to support purchasing power over time. |
| High-Quality Equity ExposureCompanies that have the ability to continually increase their dividend distributions are typically supported by stable earnings growth. They also tend to be well capitalized with strong revenue streams and free cash flows. |
| Enhanced Risk-Adjusted PerformanceDividends have historically played an important role in total return. In down and volatile markets, distributions can help buoy total returns. This may help mitigate downside risk with the added benefit of upside participation. |
We believe that dividend growth products tend to feature companies with more mature, consistent business models, as evidenced by underlying companies’ ability to continually grow returns of capital to shareholders, regardless of the economic backdrop. In addition, these companies generally feature more reasonable valuations than secular growth companies that at present typically do not pay dividends and trade at elevated valuations versus history. This differs from dividend yield products that are often associated with a deep value bias and exposure to highly cyclical areas of the market; both of which could prompt these products to struggle should the economy enter into a recession that has yet to be fully discounted.
Locating the Cream of the Crop
We think an active approach in dividend growth ETF investing is especially important given the need to constantly adjust for new information and maintain agility. While passive dividend growth strategies can have strict, often backward-looking rules for both inclusion and exclusion, active managers are able to utilize forward-looking indicators to fuel decision making for companies that are well positioned to achieve dividend growth. In addition, active managers are able to identify and make adjustments based on their identification of investment candidates that may be positioned to cut dividends.
If looking for long-term investment options for a portfolio, investment styles that seem to transcend market noise can make for appealing choices, though they are difficult to come by. We think dividend growers answer the call and provide a unique value proposition for investors given their combination of potential equity upside participation, downside valuation support and focus on delivering dividend income.
Important Information
The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a recommendation to purchase or sell a particular security.
Investing entails risk and there can be no assurance that any investment will achieve profits or avoid incurring losses. There is no guarantee any company or investing strategy will pay dividends.
All investments involve risk including the possible loss of principal. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings.
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