Durability And Royalty With This Dividend ETF

With bond yields low in the United States and negative interest rates permeating much of the developed world to the tune of over $10 trillion negative-yielding sovereign debt, dividend stocks continue to matter.

There are no shortage of exchange-traded funds with which to accomplish the goal of building a dividend portfolio, but how an ETF arrives at its dividend conclusions is vital to investor outcomes. Some dividend ETFs, particularly those focusing on U.S. dividend payers, use similar though not identical methodologies.

For example, the ProShares S&P 500 Dividend Aristocrats ETF NOBL is not the only ETF following a dividend aristocrats index, but NOBL has earned its stripes. Earlier this year, NOBL topped $1 billion in assets under management, a total that had more than doubled by the end of the second quarter, according to issuer data.

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Last year was another banner one for U.S. dividend growth, but with higher interest rates in place and more rate hikes expected, S&P 500 dividend growth is anticipated to slow in 2016.

Knowing that and following the struggles encountered by some dividend exchange-traded funds in 2015, income investors need to be selective with their dividend ETFs in 2016. That increased selectivity should include NOBL.

“Not every dividend-paying stock in the S&P 500 can become a dividend aristocrat. Between 1994 and 2016, the number of stocks that qualified to be part of the index ranged from 41 to 64, representing approximately 8 percent to 13 percent of the underlying S&P 500 universe.

"One can argue that the dividend aristocrats symbolize the tier-one, blue-chip companies with solid balance sheets, and therefore, they can weather market cycles. We can see what a difficult feat that is by observing the number of constituents from 2009-2011, the years following the 2008 financial crisis, when many dividend-paying companies either cut or omitted their dividends altogether,” according to S&P Dow Jones Indices.

NOBL tracks the S&P Dividend Aristocrats Index, which mandates each holding has a dividend increase of at least 25 years. The ETF is also an equal-weight fund, which helps mitigate stock-specific risk. However, the ETF allocates nearly 26 percent of its lineup to consumer staples names, by far its largest sector allocation. Some of the ETF's potential sensitivity to rising interest rates is tempered by a less than 4 percent combined weight to telecom and utilities stocks.

NOBL is about a month way from its three-year anniversary. In its 35 months on the market, NOBL has topped the S&P 500 by 450 basis points the Vanguard Dividend Appreciation ETF VIG by a whopping 1,210 basis points.

“Since companies across all sectors may follow an increasing dividend-payout policy and can exhibit consistent dividend growth, the S&P 500 Dividend Aristocrats draws its constituents from a broad spectrum of industries,” added S&P Dow Jones Indices.

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