Following its worst annual showing since inception in 1976, the Bloomberg US Aggregate Bond Index is higher by 3.34% to start 2023. That’s an encouraging sign, but stocks are markedly higher, indicating investors may want to evaluate equity income ideas.
At a time when volatility is still possible if not likely in the bond market, dividends could, well, pay dividends for income-hungry investors. The strategy worked in 2022 as dividend equities and the related exchange traded funds were among the brighter spots in an otherwise dour year for stocks. Additionally, with value in style, equity income could be a style poised to outperform for an extended period.
“Dividend payers may not be top-of-mind for investors seeking high risk-adjusted returns, because the last decade hasn’t been kind to them,” according to AllianceBernstein research. “Over seven of the last 10 years through 2021, the MSCI USA High Dividend Yield Index and the FTSE High Dividend Yield Index underperformed the S&P 500. High-dividend payers are often seen as old, stodgy companies, like utilities or food manufacturers, with limited growth potential. As investors flocked to high-flying technology and internet growth companies, dividend stocks seemed like antiquated investment options.”
Indeed, investors have ample choices when it comes to plain vanilla equity income ETFs, but some fresher paces on the block could be interesting ideas this year, too.
KraneShares S&P Pan Asia Dividend Aristocrats ETF (KDIV)
A mistake that many dividend investors often make is assuming that the concepts of steady equity income and reliable payout growth are confined to the U.S. That’s not the case and as the newly minted KraneShares S&P Pan Asia Dividend Aristocrats ETF (KDIV) proves, there are attractive dividend opportunities to be had in developed and emerging Asia.
KDIV, which debuted last September, follows the S&P Pan Asia Dividend Aristocrats Index. That benchmark includes China, Japan, Australia and other Asian nations. Speaking of dividend consistency, member firms in that index must have minimum payout increase streaks of seven years. Owing to the index’s methodology, KDIV offers investors other perks.
“Companies must also have positive earnings and a dividend payout ratio between 0% and 100%," according to S&P Dow Jones Indices. "To avoid dividend traps, stocks with an indicated annualized dividend (IAD) yield above 10% are excluded from the index. The S&P Dividend Aristocrats methodology provides a ballast for investors since the ability to consistently grow dividends every year through different economic environments can be an indication of financial strength and discipline."
Xtrackers S&P ESG Dividend Aristocrats ETF (SNPD)
Another new addition to the world of equity income ETFs, the Xtrackers S&P ESG Dividend Aristocrats ETF (SNPD) debuted last November and also adheres to dividend aristocrats methodology as it follows the S&P ESG High Yield Dividend Aristocrats Index.
By some estimates, investors can expect at least 3% dividend growth in 2023 -- a theme SNPD readily taps into. However, the rookie fund is relevant for another reason because it combines both equity income and environmental, social and governance (ESG) benefits. Over time, that could be an attractive story for investors.
“Dividends tend to increase after periods of market tumult to attract investors back to shares,” according to Bank of America research. “Secular shifts between price return and dividend growth leadership are also evident. Since 1872, annual dividend growth has averaged 4.3% compared to 6.3% price returns. Annual dividend growth averaged 6.2% between 1970 and 1980 after an overvalued, concentrated market corrected sharply. Price returns only averaged 3% per year over the same decade. Similarly, dividends grew by 6.2% on average between 2000 and 2007 while annual price returns averaged just 2.5%.”
Global X Nasdaq 100 Covered Call ETF (QYLD)
The Global X Nasdaq 100 Covered Call ETF (QYLD) isn’t a dividend fund in the traditional sense of the term, but it does provide equity-adjacent income by writing covered calls on the Nasdaq-100 Index (NDX).
For its virtues, namely significant long-term outperformance of other domestic equity benchmarks, NDX isn’t a high yielder as evidenced by a current dividend yield of 0.90%. That’s less than what money markets and CDs pay.
Fortunately, the $6.69 billion QYLD flips that script, sporting a trailing 12-month distribution yield of 13.65%, according to issuer data.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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