Want to Predict Future Dividends? Buy This! (LEAD)

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When all was said and done, 2015 was another solid year for dividends and dividend growth.

reality-sharesHowever, some dividend exchange-traded funds were pinched by the anticipation of and subsequent realization of the Federal Reserve’s first interest rate hike in nearly a decade.

But while dividend fund investors might have a difficult year ahead, the new Reality Shares DivCon Leaders Dividend ETF (LEAD) could help ease the pain.

The Case for LEAD

The good news? “Aggregate dividend payments totaled $103.3 billion for Q3 and $410.8 billion over the trailing twelve months. The TTM amount ending in Q3 marked the largest dividend amount in at least ten years. On a per share basis, the TTM dividend payout was $42.36, which represented 10.9% growth year-over-year,” according to FactSet.

The bad news for income investors is that many market observers are forecasting a difficult year ahead for dividends and dividend ETFs.

Translation: The pace of payout growth investors have become accustomed to over the past several years is unlikely to be repeated in 2016.

“2016 will see the pace of ordinary dividend growth paid by firms in Europe, the UK, Asia and the US fall to 5% on a constant currency basis; nearly half the 9.3% growth seen in the previous four calendar years,” according to financial data firm Markit.

U.S. dividends are expected to grow at a solid clip this year, though by some estimates, that growth will lag what was seen in recent years. That means investors should become increasingly selective when it comes to dividend ETFs.

Plenty of dividend ETFs, most by intent, offer exposure to consistently growing payouts, but a new approach to dividend growth is offered by the Reality Shares DivCon Leaders Dividend ETF.

LEAD, which debuted earlier this month, “seeks to invest in the large cap U.S. companies with the highest probability of increasing their dividends within a year, based on their DivCon dividend health scores,” according to Reality Shares.

In layman’s terms, LEAD’s mission is to identify companies, selected from a universe of the 500 largest U.S. companies by market value, most likely to increase their dividends.

Many dividend ETFs purport to offer dividend growth, but how those dividend ETFs do that is backward-looking because those funds focus on past dividend hikes and assume those dividends will continue rising.

LEAD uses a vastly different approach.

LEAD’s methodology “is based on a weighted average of seven quality factors including cash flow, dividend history, buybacks and analyst forecasts, which are correlated to dividend growth,” according to Reality Shares.

Consumer discretionary and industrial names combine for more than 56% of this dividend ETF’s weight. Those are not surprising sector allocations when considering consumer discretionary has recently been one of the biggest contributors to S&P 500 dividend growth while the industrial sector, broadly speaking, has lengthy history of consistently rising dividends.

The fact that the energy and materials sectors combine for less than 6% of LEAD’s weight also is not surprising as those sectors were home to most of the negative dividend actions seen in the S&P 500 last year.

What is unusual is LEAD’s weights to financial services and technology stocks.

LEAD’s 11.4% weight to tech stocks is about average compared to legacy dividend ETFs, and surprising not only because tech has been legitimate source of S&P 500 dividend growth in recent years, but also because many of the largest U.S. tech companies that already pay dividends have massive cash hoards, which indicate those dividends can continue rising.

This dividend ETF’s light weight to financials is surprising because that sector has reclaimed its perch, vacated during the financial crisis, as the biggest contributor on a percentage basis of S&P 500 dividends.

No stock commands more than 3.1% of LEAD’s weight. The ETF’s top holdings include McKesson Corporation (MCK), Starbucks Corporation (SBUX) and Tiffany & Co. (TIF).

LEAD charges 0.43% per year, or $43 for each $10,000 invested.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

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Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/dividends-reality-shares-divcon-leaders-dividend-etf-lead/.

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