Hunting for yield? Dividend ETFs may offer some surprising upside

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2020 hasn’t been kind to income investors. Global bond yields are at all-time lows and companies have spent the past few months reducing, suspending, or outright ending their dividend payments.

But a new analysis from CFRA shows that the picture is a little brighter than investors may realize, and suggests some ways to pick up a little extra income.

“In the first half of 2020, 164 S&P 500 member firms either increased or initiated a dividend (a favorable dividend action), compared to 62 such companies that had negative actions,” wrote Todd Rosenbluth, CFRA’s head of mutual fund and exchange-traded fund research.

Put another way, Rosenbluth wrote, 73% of all dividend actions in the first half of the year were favorable to investors.

It’s only fair to note, as Rosenbluth does, that companies in the S&P 500 SPX, +0.81% index are among the most widely-held stocks, in part because they may be seen as safer: they “tend to have relatively strong balance sheets as well as recurring cash flow to support consistent dividend payments,” in his words.

As might be expected, companies outside of the S&P 500 haven’t fared as well through the COVID-19 crisis and the collapse in the oil markets this spring. In the second quarter, Rosenbluth’s analysis shows, 244 companies, regardless of index representation, increased dividends, down 50% from the same period in 2019. Some 639 companies cut or eliminated dividends — nine times as many as last year.

Positive dividend actions for selected S&P 500 sectors
Utilities 94%
Financials 91%
Health Care 89%
Information Technology 82%
Industrials 77%
Energy 55%
Consumer Discretionary 39%
Source: CFRA analysis

For investors, one takeaway may be that ETFs can offer some protection against negative dividend actions, and a way to take advantage of any upside moves. Rosenbluth offers this example: The ProShares S&P 500 Dividend Aristocrats ETF NOBL, +0.96% has 27% of its portfolio allocated to the Industrials sector, where 77% of all dividend actions were positive — as shown in the chart above — and only 10% of its holdings in Consumer Discretionary, where only 39% of such actions were positive.

In the year to date, the fund’s total return is -9.10%, compared to a 2% increase for the broader MSCI USA Large-Cap Index, according to FactSet data. Over the past 12 months, the fund has yielded 2.3%. During that time, the yield on the 10-year US Treasury note TMUBMUSD10Y, 0.637% has rarely topped 2%.

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