Dividend Growth Provides A Spark For These ETFs

S&P 500 member firms delivered some solid dividend growth numbers in the first half of 2018.

“Aided by strong earnings and corporate management's confidence in the future, more than 40 percent of the S&P 500 constituents raised their dividends in the first half of 2018,” said CFRA Research Director of ETF & Mutual Fund Todd Rosenbluth in a note out Wednesday. “Dividend hikes occurred in various sectors, highlighting the benefits of using diversified funds to gain equity income exposure.”

What To Know

With the Federal Reserve boosting interest rates twice in the first half of the year, some dividend exchange traded funds struggled relative to the broader market. The Vanguard Dividend Appreciation ETF VIG and the SPDR S&P Dividend ETF SDY are up 2.3 percent and 1 percent, respectively, year-to-date.

VIG and SDY are two of the largest U.S. dividend ETFs and both focus on dividend growth. SDY follows the High Yield Dividend Aristocrats Index, which requires member firms to have minimum dividend increase streaks of at least 20 years. VIG's underlying index has a minimum dividend hike streak requirement of a decade.

Why It's Important

“According to Howard Silverblatt, Senior Index Analyst of S&P Dow Jones Indices, there have been 216 dividend increases by S&P 500 companies, with 84 occurring in the second quarter,” said Rosenbluth. “The average second quarter increase was 14 percent, up from 12 percent a year earlier, indicating greater optimism.”

More than 400 members of the S&P 500 pay dividends. As of July 10, the S&P 500 yielded 1.90 percent, a level surpassed by some sectors and lagged by others. Health care is an example of a sector that yields less than the S&P 500 (1.8 percent), but is also home to robust dividend growth.

SDY devotes 5.81 percent of its weight to health care stocks while that sector represents 12.1 percent of VIG making it the Vanguard fund's third-largest sector allocation.

What's Next

With U.S. companies sitting on mountains of repatriated cash following last year's tax reform legislation, buybacks and dividends are proving to be among the strategies for deploying some of that cash.

More interest rate hikes could weigh on dividend ETFs, but VIG is lightly allocated to rate-sensitive sectors as utilities and telecommunications names combine for just 3.2 percent of the fund's weight.

CFRA has Overweight ratings on both SDY and VIG.

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