As is the case in life, there are no sure things in investing. That sentiment certainly applies to dividend stocks. In recent years, some dividend offenders’ payout increase streaks could be measured in decades. However, for a variety of company-specific reasons, those firms cut or suspended dividends.
ETFs such as the ALPS O’Shares U.S. Quality Dividend ETF (OUSA) don’t come with guarantees of not holding possible dividend offenders. Still, payout funds with the right methodology can help equity income investors avoid dividend disappointment.
OUSA, which turns 11 years old in July, is part of the dividend ETF camp deploying the right methodology. For its part, the ALPS fund focuses on dividend growth, favorable volatility traits and quality. Those factors don’t guarantee complete avoidance of companies with the potential to cut or halt payouts. They put the odds on the side of investors, though.
OUSA Has the Right Stuff
OUSA’s trailing 12-month yield is just 1.39%. That may not be a selling point for yield-hungry investors, but it’s a favorable trait for multiple reasons. First, it implies room for long-term payout growth. Second, most companies that alter dividends for the worse are high-yield firms.
“In a low-yielding environment, equity investors can be tempted to target stocks with fat payouts. But that can get risky,” noted Morningstar’s Dan Lefkovitz. “The market’s juiciest yields can be found in troubled sectors, industries, and companies. One way for a company’s yield to rise is for its share price to fall, which often happens due to fundamental reasons.”
Indeed, dividend durability is essential. Some payout stocks and ETFs, including OUSA, offer that durability. Others don’t.
Another advantage the ALPS ETF offers: heavy exposure to sectors with low to moderate payout ratios. For example, technology, financials, and healthcare stocks combine for more than 53% of the ETF’s portfolio. Broadly speaking, payout ratios in those groups are tolerable, if not low. That implies that payouts don’t burden dividend payers in those sectors. That’s crucial, because history confirms many payout offenders are often high payout ratio names.
“The payout ratio measures the percentage of a company’s earnings that it pays out in dividends,” added Lefkovitz. “For many equity-income investors, there’s a happy medium, where the company is generously returning cash back to shareholders, but with a cushion. Indeed, we’ve found that in recent years, companies with high payout ratios were most likely to cut their dividends.”
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VettaFi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for OUSA, for which it receives an index licensing fee. However, OUSA is not issued, sponsored, endorsed, or sold by VettaFi. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OUSA.
