There are hundreds of exchange traded funds that focus on dividend-paying stocks in some form or fashion, so it's possible some will go overlooked, but that's not an indictment of those products.
Just over a year old, the VanEck Vectors Morningstar Durable Dividend ETF (NYSE: DURA) isn't getting the attention it deserves, but that could be poised to change as investors prize quality and decent yields. Year to date, DURA is higher by almost 20% and the VanEck yields 2.41%, 60 basis points above the dividend yield on the S&P 500.
DURA follows the Morningstar US Dividend Valuation Index, “which is intended to track the overall performance of high dividend yielding U.S. companies with strong financial health and attractive valuations according to Morningstar,” notes VanEck.
Why It's Important
Data suggest that due in large part to sagging bond yields, investors are embracing dividend ETFs in significant fashion, a trend that could ultimately benefit DURA.
“These dynamics have fueled the influx of investment in dividend-focused stock ETFs globally,” VanEck said in a recent note. “These dividend strategies generally feature a dividend yield in excess of the broad U.S. equity market and, in many cases, in excess of many segments of the bond markets.”
DURA eschews two of the most common approaches found among dividend ETFs: focusing on yield on dividend increase streaks. Plenty of investors like these strategies, but those dividend-seeking methodologies aren't risk-free bets.
“These strategies aren’t without risk. While dividend investment strategies as a whole may have featured lower volatility and in turn an attractive risk/reward profile when compared to the broad market, relying solely on historical characteristics can lead to unintended risks—namely, dividend traps,” according to VanEck.
DURA isn't heavily allocated to traditional high-yield sectors. The fund features no real estate exposure and a weight of just 7.1% to the utilities sector.
“Focusing on high yielding stocks can lead investors to areas of the market that have been under recent duress (as stock prices fall, yield generally rises) or to companies for which the market requires an attractive yield as compensation for ownership,” according to VanEck. “Many high yielding stocks are high yielding for a reason. Similarly, relying solely on a company’s history of dividend payments can lead to situations like 2008 and 2009, when many companies with a decades-long track record of paying distributions were forced to suspend shareholder payments.”
DURA devotes 35.3% of its weight to health care and financial stocks, giving it a value tilt and significant exposure to higher quality, lower yielding sectors that can continue growing dividends on the back of sound balance sheets and significant free cash flow.