Inklings Of A Dividend ETF Resurgence

Entering 2018, it was widely expected that the Federal Reserve would continue on its path of raising interest rates, potentially presenting challenges to dividend stocks and exchange traded funds along the way.

Indeed, there are plenty of domestic dividend strategies that are trailing the S&P 500 this year, but with just over three months left in 2018, some dividend ETFs are positioned to potentially outperform the broader market this year.

What Happened

Investors should not get too carried away with a single day's worth of trading action, but on Tuesday, Sept. 18, 33 ETFs hit record highs. That group included six dividend ETFs. The iShares Core Dividend Growth ETF DGRO was one of the six.

With Tuesday's gain, DGRO is up 8.9 percent year-to-date, including dividends paid. That means the iShares ETF is trailing the S&P 500 by 100 basis points, but over the past three months, DGRO is displaying momentum against the broader market, topping the S&P 500 by nearly 200 basis points during that period.

Why It's Important

The bulk of the dividend ETFs hitting all-time highs Tuesday were dividend growth funds, a strategy that typically performs better in rising rate environments than weighting stocks by yield. Yield-based dividend ETFs are often heavily allocated to rate-sensitive sectors, while the opposite is usually true of dividend growth funds.

As its name and ticker imply, DGRO is a dividend growth ETF. The fund targets the Morningstar US Dividend Growth Index and holds 451 stocks. To be eligible for inclusion in that index, companies must have increased payouts for at least five consecutive years. Global dividend growth could be as high as 7.4 percent this year, led by developed markets such as the U.S. and large European economies.

What's Next

DGRO's trailing 12-month dividend yield is just 2 percent, highlighting the dividend growth possibilities with this fund.

Additionally, the iShares fund is heavily allocated to sectors that are voracious boosters of payouts. The healthcare sector is DGRO's largest sector weight at 17.82 percent. That group has long been a dependable destination for rising payouts. Over the past several years, financial services and technology have been major drivers of domestic dividend growth. Those two sectors combine for 34 percent of DGRO's roster.

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