An Ideal ETF For Dividend Growth

U.S. dividend growth remains impressive even as interest rates are rising. The dividend growth theme is expected to continue, particularly in the current quarter.

“IHS Markit is forecasting that quarterly dividends declared by firms in the S&P 500 will top $115 billion in the current calendar quarter, up 2.3 percent from $112.5 billion declared in Q1,” said the research firm. “Of the 404 large-caps that announce quarterly payments, we expect 71 to increase their dividend payments over Q1 levels. We don't foresee any dividend cuts in Q2, which would mark a second consecutive quarter of wholly positive actions.”

Scores of exchange-traded funds are levered to the theme of dividend growth. One that should note be overlooked in that conversation is the Fidelity Dividend ETF for Rising Rates FDRR.

What To Know

As its name implies, FDRR is a dividend ETF designed to endure rising interest rates, something that's happening this year. The Federal Reserve raised rates in March and some bond market observers are forecasting as many as four rate hikes before the end of 2018. FDRR tracks the Fidelity Dividend Index for Rising Rates.

That benchmark “is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields,” according to Fidelity.

Why It's Important

While its rising rates advantage is crucial to its success, FDRR's also features the right sector mix to tap into growing U.S. dividends.

“At an industry level, Financials are expected to account for 23 of the increases worth $670 million in aggregate,” said Markit. “The next largest sector for dividend increases is Technology, with 10 firms expected to announce $658 million worth of increases. We are projecting Apple to increase its dividend by $304 million in aggregate terms. This is an increase of 10 percent, consistent with the firm's habitual growth rate since 2014.”

The technology and financial services sectors are FDRR's two largest sector weights, combining for over 40 percent of the fund's weight. Apple Inc. AAPL is the ETF's largest individual holding at 4.71 percent.

What's Next

As the data suggest, the second quarter is prime time for dividend hikes and that includes sectors beyond tech and financials. Health care and consumer goods stocks are expected to deliver a spate of dividend hikes this quarter. Those sectors combine for almost 20 percent of FDRR's roster.

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