When looking at dividend exchange traded funds, many investors are seduced by one or two superficial traits, namely dividend yield or length of payout increase streaks.
Those are two of the most common methodologies used by dividend ETFs' underlying indexes. While those metrics are important, there is more to the dividend game.
What Happened
The O'Shares FTSE US Quality Dividend ETF OUSA has a yield of 3.07 percent, well above what investors get on 10-year Treasuries and more than 100 basis points above the trailing 12-month yield on the S&P 500.
The $427.34 million OUSA follows the FTSE USA Qual/Vol/Yield Factor 5% Capped Index. That benchmark “is designed to measure the performance of publicly-listed large-capitalization and mid-capitalization dividend-paying issuers in the United States that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds, as determined by FTSE Russell,” according to O'Shares.
Why It's Important
Investors often associated dividend strategies as being value plays and while OUSA is not explicitly a value strategy, some of its holdings can be considered value stocks. Additionally, dividend stocks and ETFs can be less volatile than basic broad market funds when markets decline.
OUSA lived up to that billing last year, declining less than the S&P 500 and the S&P 500 Value Index while being less volatile than both benchmarks. The O'Shares dividend fund is also less volatile than each of the 11 S&P 500 sectors, according to issuer data.
Return on assets (ROA), a key metric used to evaluate a company's ability to sustain and grow dividends, also underscores OUSA's advantages. The average ROA for OUSA components is 10.70 percent, compared to 8 percent for the S&P 500 Value Index and 9 percent for the S&P 500. Additionally, OUSA's yield is higher than those of eight of 11 sectors.
What's Next
With speculation rampant that investors could seek refuge in value strategies this year, OUSA could make for a credible alternative to dedicated value funds. The fund is defensively positioned with a combined 31.34 percent weight to the consumer staples and healthcare sectors, but beyond the staples exposure, OUSA is not excessively allocated to high-yielding sectors, indicating the fund could withstand surprise tightening by the Federal Reserve this year.
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