Amid stock market turbulence and forecasts for a global slowdown, dividend ETFs look attractive to certain investors, particularly to those who are looking to park their money in relatively stable instruments. Besides the general attraction for quality dividend payers, investors also welcome the regular current income and some protection to capital gains offered by dividend stocks.
While 2015 witnessed solid dividend growth, many analysts forecast a difficult year for 2016. Financial data firm Markit predicts dividend growth to fall 5 percent on a constant currency basis, nearly half the 9.3 percent average growth witnessed in the previous four years.
That means investors need to be selective when picking dividend payers. The newly launched Reality Shares DIVCON Leaders Dividend ETF (LEAD) could be a natural choice in easing the stock picking pain.
To be sure, there exists a plethora of dividend ETFs that, by intent, offer exposure to consistently growing dividends. But their investment strategy remains backward looking as fund managers consider historical dividend growth and assume those growth trends will continue in future.
LEAD, on the other hand, tries to front-run the market by investing in large-cap US companies from a universe of the largest 500 firms by market capitalization that have the highest probability of increasing their dividends within a year. These probabilities are calculated through the firm’s proprietary DIVCON scoring system, which is a rules-based weighting and scoring methodology.
In order to achieve its investment objective, the new fund focuses on seven quality factors that include analyst forecasts, dividend history, cash flow and buybacks. According to Reality Shares, these quantitative factors are correlated to a company’s likelihood to increase or decrease future dividends.
Consumer discretionary (28.48 percent) and industrials (28.05 percent) contribute more than 56 percent of LEAD’s weight, which is not surprising since discretionary stocks have been the biggest contributors to S&P 500 dividend growth recently and industrials have a long history of rising dividends.
Consumer staples (11.59 percent) and information technology (11.43 percent) also receive double-digit allocations while energy (2.95 percent) and materials (2.76 percent), given the recent slump in commodity prices and the subsequent spate of defaults, receive the least weightings.
No stocks receive more than 3.11 percent of total weight and top holdings include such well-known names as Tyson Foods, Starbucks and Tiffany.
LEAD charges 0.43 percent annually.
Disclosure: No holdings