ETF Edge

Dividend payers are still 'winners in this market,' ETF analyst says. Here's why

Here's how dividend-based ETFs are managing shareholder payout cuts: Issuer

There's been a lot of dividend doomsday talk on Wall Street this earnings season.

As of Monday, roughly a quarter of companies in the S&P 500 had suspended sharing guidance for future quarters, with at least 30 cutting or pausing dividend payouts in an effort to stem losses tied to the coronavirus pandemic.

Some have wondered how a wave of dividend cuts could affect dividend-based exchange-traded funds, but ETF analysts say the damage will likely be limited.

"I think dividend increases or at least dividend consistency is a pretty good quality proxy," Dave Nadig, chief investment officer and director of research at ETF Trends, told CNBC's "ETF Edge" on Monday.

Nadig pointed out that Apple, Johnson & Johnson, Costco and Newmont Mining all increased their dividends this quarter, which he attributed both to the companies' strong cash positions and "management's confidence in their ability to weather this storm."

"The key difference here is between ETFs that focus on dividend growth and those that focus on high yield."
Simeon Hyman
Global Investment Strategist, ProShares

Simeon Hyman, global investment strategist at ProShares and the man behind the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), said investors should take note of an important distinction in the dividend ETFs on the market.

"The key difference here is between ETFs that focus on dividend growth and those that focus on high yield," Hyman said in the same "ETF Edge" interview.

"NOBL is absolutely in the dividend growth camp," he said. "And the rules for inclusion of the index — we follow the S&P 500 Dividend Aristocrat index — is 25 years of uninterrupted dividend increases and then the portfolio is equally weighted."

Hyman added that half of NOBL's holdings are in the top quintile of the S&P 500 by credit rating, calling it "a very high-quality portfolio." By comparison, only 10-15% of the stocks in the iShares Select Dividend ETF (DVY), a more high yield-focused fund, are in that upper quintile, he said.

"So, that's really important, because what we've seen is the high yielders with the lower credit ratings have actually underperformed in this downturn even though interest rates came down, which should've helped them out a little bit," Hyman said.

"I think that portfolio will continue to be a bit of a 'winners in this market' portfolio."
Dave Nadig
Chief Investment Officer and Director of Research, ETF Trends

Nadig of ETF Trends said he wouldn't be surprised to see funds like NOBL continue to win despite potential structural changes.

"I would not be surprised to see some shifts, even in something like NOBL, because not every one of those holdings is going to be able to keep this up," Nadig said. "But regardless, I think that portfolio will continue to be a bit of a 'winners in this market' portfolio because it is that proxy quality. So, I agree: I think it's a terrible time to be chasing yield, but it's a great time to be trying to find quality, cash-flow-positive companies."

And even if some companies get cut from NOBL for failing to keep pace with their dividend growth, Hyman said the cuts would be in investors' best interests.

"If there is a name cut, you could actually see the dividend go up" because companies that slash their shareholder payouts typically underperform, Hyman said. "If you go back to 2008 and you look at the S&P 500 Dividend Aristocrat Index, it lost names in '08, but the dividend actually went up."

If NOBL decides to oust one of its held stocks, the proceeds will automatically be invested across the rest of its constituents, the strategist said.

NOBL's top holdings include Lowe's, Franklin Resources, Roper Technologies and T. Rowe Price. It ended trading up nearly 2.5% on Friday and is down over 15.5% year to date.