While there has been a spate of dividend increases from S&P 500 member firms over the past several years, some of which extend lengthy histories of payout boosts, the concerning reality is that dividend growth in the U.S. is actually slowing.
The current payout ratio on the S&P 500 is 44.4%, which is disappointing considering the aforementioned post-financial crisis surge in payouts. That payout ratio is even more of a dud when learning that the 80-year average payout ratio for the benchmark U.S. equity index is 51.4%.
Tepid payout growth puts added importance on proper analysis and selection of dividend exchange-traded funds. Not only that, but there are potentially mixed messages regarding some dividend ETFs heading into 2017.
For example, the Federal Reserve raised interest rates last week and is looking to do more of the same, possibly three times, next year. That means those dividend ETFs heavy on rate-sensitive sectors could be vulnerable.
On the other hand, some dividend ETFs could have the wind at their backs if President-elect Donald Trump is successful in getting Congress to revise tax provisions that have previously encouraged companies to stash mountains of cash outside the U.S.
“Moody’s estimates there will be $1.3 trillion in corporate cash sitting overseas by the end of 2016, including $230 billion held by Apple Inc. (NASDAQ:AAPL) alone,” according to Forbes.
With eyes on Capitol Hill and the Fed, let’s look at some dividend ETFs that could thrive in 2017.
The Best Dividend ETFs: Schwab U.S. Dividend Equity ETF (SCHD)
Expense ratio: 0.07% per year, or $7 on a $10,000 stake.
Dividend yield: 2.6%.
The Schwab Strategic Trust (NYSEARCA:SCHD) is one of the size kings among U.S. dividend ETFs as confirmed by its $4.9 billion in assets under management, but for frugal income investors, there is another reason to know SCHD. With its aforementioned annual fee of just 0.07% SCHD is the least expensive dividend ETF on the market.
SCHD tracks the Dow Jones U.S. Dividend 100 Index, which not only features some of the largest U.S. dividend payers, but also companies with dividend increase streaks of at least a decade. This dividend ETF is home to 116 stocks.
While SCHD’s 24.4% weight to consumer staples, a sector that is pricey and rate-sensitive, is potentially concerning as the Fed turns hawkish, the ETF more than offsets its staple exposure with allocations to cyclical sectors that should perform well as rates climb higher. For example, SCHD allocates over 48% of its combined weight to cyclical technology, industrial and energy stocks.
Nine of SCHD’s top 10 holdings are members of the Dow Jones Industrial Average, with PepsiCo, Inc. (NYSE: PEP) being the outlier.
The Best Dividend ETFs: ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Dividend yield: 1.9%.
The ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA:NOBL) has quickly become a force to be reckoned with. In just over three years on the market, NOBL has been one of the best dividend ETFs in terms of asset-gathering acumen (nearly $2.7 billion in assets).
More importantly, NOBL has also been one of the best dividend ETFs in terms of performance over that stretch, returning more than 34% while easily topping the largest U.S. dividend ETF since inception.
NOBL is also one of the best dividend ETFs for income investors looking dependable dividend growth. NOBL mandates its holdings have payout increase streaks of at least 25 years. Dividend stocks in NOBL’s lineup include Dow Jones components 3M Co (NYSE:MMM), Johnson & Johnson (NYSE:JNJ) and Exxon Mobil Corporation (NYSE:XOM).
NOBL’s dividend growth potential is particularly notable at a time when data indicate U.S. inflation is creeping higher. Dividend growth has historically outpaced inflation, underscoring the utility of dividend ETFs like NOBL in the year ahead.
A drawback with NOBL is its relatively shallow roster of just 50 stocks.
The Best Dividend ETFs: WisdomTree SmallCap Dividend Fund (DES)
Dividend yield: 2.3%.
Small-cap stocks are becoming increasingly important parts of the dividend equation, and one of the best dividend for accessing that theme is the venerable WisdomTree SmallCap Dividend Fund (NYSEARCA:DES).
DES follows the WisdomTree SmallCap Dividend Index, which is a departure from ordinary small-cap indexes in that it is dividend-weighted. DES’s emphasis on cash dividends helps mute the ETF’s volatility compared to other small-cap indexes.
DES could be one of the best dividend ETFs in 2017 for another reason. President-elect Donald Trump has signaled some support for a stronger dollar, and if the Fed raises interest rates again, the greenback is likely to move higher. This is actually good news for smaller stocks, such as those found in DES, because small caps generate the bulk of their revenue in the U.S., meaning a stronger dollar is an advantage.
As of this writing, Todd Shriber owned shares of JNJ.