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Why You Should Invest in Dividend ETFs

Jeff BishopJeff Bishop ·

If you like receiving passive income, dividend ETFs and mutual funds could provide that. Generally, dividend funds could provide investors with safe retirement income, along with long-term growth. Despite the fact that interest rates could rise and cause hiccups in the performance of some dividend ETFs, companies included in dividend ETFs could generate more revenues and earnings due to the strengthening economy and rising rates. Consequently, dividend fund investors should take into account interest rate risk, as well as market risk, risk of companies cutting dividends, and non-diversification risk.

Now, with Trump taking office in 2017, this could be good news for dividend ETFs and funds. Trump aims to cut corporate taxes and repatriate cash held overseas by companies, which should increase revenues and allow companies to return a higher portion of their profits to investors. Consequently, this could increase dividend funds’ performance and dividend payouts.

Let’s get into some ETFs that could rise and provide investors with income in 2017.

ProShares S&P 500 Dividend Aristocrats ETF

The ProShares S&P 500 Dividend Aristocrats ETF (BATS: NOBL) is one dividend that income investors may want to consider in 2017. S&P 500 dividend aristocrats are companies included in the S&P 500 Index and have raised their dividends for at least 25 consecutive years. Consequently, this ETF is considered stable, and S&P 500 dividend aristocrats are unlikely to cut their dividends and tarnish their track record.

The ETF tracks the performance of the S&P 500 Dividend Aristocrats Index, NOBL’s benchmark index. The benchmark index must contain a minimum of 40 stocks, which are equally weighted. Additionally, the index cannot hold more than 30% of its weighting in one single sector.

NOBL slightly underperformed the market and returned 11.58%, in 2016. However, the fund distributed $1.15 per share in the form of cash dividends in 2016, a 15.4% increase year over year. Now, the U.S. economy is expected to strengthen under a Trump administration, which could cause the ETF to rise in 2017. That being said, you should take into account the risks associated with this ETF before investing.

Here’s a chart of NOBL’s dividend yield and table of dividend payments:

Source: Bloomberg

SPDR S&P Dividend ETF

The SPDR S&P Dividend ETF (NYSEARCA: SDY) is another ETF that provides exposure to S&P 500 dividend aristocrats, and it could rise in 2017. SDY aims to track the performance to the S&P High Yield Dividend Aristocrats Index, the fund’s benchmark index. The index tracks the performance of the highest dividend yielding stocks included in the S&P Composite 1500 Index that have consistently raised dividends for at least 20 consecutive years.

The same theme with NOBL comes into play with SDY. Companies included in the index are unlikely to cut dividends and are relatively stable. Some of the top holdings in SDY include AT&T, Chevron, Caterpillar, Target, and IBM.

SDY outperformed the S&P 500 Index by nearly 9% in 2016 and distributed $2.24 per share in income, excluding short-term and long-term capital gains.

Take a look at SDY’s dividend yield and distributions below:

Source: Bloomberg

WisdomTree LargeCap Dividend Fund

The WisdomTree LargeCap Dividend Fund (NYSEARCA: DLN) is a third ETF that could outperform the market in 2017. DLN aims to track the performance of dividend-paying large-cap U.S. stocks. This ETF provides a combination of growth potential, as well as income potential. Although DLN does not track S&P 500 dividend aristocrats like the previous two ETFs, DLN holds blue chip stocks, such as Johnson & Johnson, Pfizer, Apple, Microsoft, Verizon, and General Electric.

Again, with the strengthening economy, Trump’s corporate tax plan and the potential deregulation in some industries, the WisdomTree LargeCap Dividend Fund is poised to grow in 2017. The fund outperformed the S&P 500 Index by over 3% and had a return of 15.51% in 2016. Moreover, the fund grew its dividend by 5.94% year over year.

Here’s a chart of DLN’s dividend yields and table of distributions:

Source: Bloomberg

The Bottom Line

There has been talks of dividend stocks being in a bubble, but dividend ETFs haven’t experienced meteoric rises nor a state of euphoria. With the changes going on in the U.S., the economy could strengthen under a Trump administration, which could cause corporate profits to rise, allowing companies to raise dividends in 2017.


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