Despite recent and expected hikes by the Federal Reserve and stocks selling off, U.S. companies paid a record amount of cash dividends in the first quarter of 2018. Within the S&P 500, the average dividend increase during the first quarter was 13.9 percent, up from 10.4 percent during the fourth quarter of 2017 and 10.2 percent a year earlier. Increases occurred across a variety of sectors, highlighting the merits of a diversified fund approach. Yet not all funds are passively or actively managed the same.
Following the recent corporate tax rate reductions, CFRA thinks share buybacks are likely to be a popular use of cash, but long-time dividend payers now have more cushion to support their dividend policies. Indeed, there were no dividend cuts among S&P 500 companies in the first quarter: an event that S&P Dow Jones Senior Index Analyst Howard Silverblatt said he had not seen dating back 15 years.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL) holds 54 companies that have raised their dividends for 25 or more consecutive years. In the first quarter of 2018, 20 constituents further increased the cash payout, including Coca-Cola, rated by CFRA as a “strong buy”; General Dynamics rated a “buy.”
In March 2018, General Dynamics hiked its dividend by 11 percent to $3.76 per share. Meanwhile, in February, Coca-Cola raised its dividend by 5.4 percent to $1.56 a share.
For NOBL, the consumer staples (25 percent of assets) and industrials (17 percent) sectors are overweighted relative to the broader S&P 500 index.
Yet, dividend payments extend beyond the large-cap style, as 71 percent of S&P 400 and 51 percent of S&P 600 constituents pay a dividend. Many have done so for 20 or more years.
SPDR S&P Dividend (SDY) tracks an S&P multi-cap dividend index of long-term dividend paying companies. These include: General Dynamics and Coca Cola, as well as mid-caps National Retail Properties and Tanger Factory Outlet Centers. Relative to the S&P 1500 index, utilities (13 percent of assets) and real estate (8 percent) are heavily weighted.
While much of the sector exposure differs, SDY and NOBL have 3 percent and 2 percent, respectively, in the growth-oriented information technology sector. Paying and raising dividends had not been a long-term priority for the sector’s S&P constituents. However, that has been changing; 76 percent of tech companies in the S&P 1500 now sport a dividend.
Vanguard Dividend Appreciation ETF (VIG), which tracks the NASDAQ US Dividend Achievers Select Index that requires 10 years of dividend increases, recently had a 14 percent weighting in the technology sector. Accenture, Microsoft and Texas Instruments are some of the larger holdings, joined by industrials (30 percent of assets) 3M, and United Technologies. Vanguard also offers this index-based strategy within a mutual fund wrapper through Vanguard Dividend Appreciation Index Fund (VDADX).
Meanwhile, WisdomTree US Quality Dividend Growth ETF (DGRW) has 21 percent of assets in the technology sector and 18 percent in industrials. In contrast, there’s a combined 1 percent in the real estate and utilities sectors.
DGRW tracks a proprietary index of large-cap dividend-paying companies that are deemed by WisdomTree to offer strong earnings growth and return-on-equity/assets characteristics. Apple and Intel are examples of DGRW’s technology holdings and both are CFRA “buy” recommendations.
For investors that want an actively managed dividend approach, Clearbridge Dividend Strategy (SOPAX) is a CFRA four star-rated equity income mutual fund.
Management uses fundamental analysis to select a diversified portfolio of companies with long histories of raising dividends. Financials (20 percent of recent assets), consumer staples (15 percent) and technology (14 percent) are the largest sectors, with holdings such as CFRA “buy” recommended Apple, Home Depot and JPMorgan Chase.
In rating more than equity ETFs and mutual funds, CFRA combines holdings analysis with fund attributes such as standard deviation and expense ratio. At the holdings level, CFRA offers forward-looking valuation assessments and incorporates S&P Global’s Credit Ratings and Global Market Intelligence’s Quality Rankings. The latter assess the historic dividend and earnings records of a company.
At CFRA, we think investors need to focus more on where a fund is headed and not to rely on how it performed in the past. We believe an understanding of what’s inside various dividend funds can support advisor and investor due diligence.
CFRA reports on the above stocks, ETFs and mutual funds and can be found on MarketScope Advisor. To request a free trial, visit www.cfraresearch.com.
Todd Rosenbluth is the director of ETF and mutual fund research at CFRA. Learn more about CFRA's ETF research here.