Investors have many choices when it comes to putting their money to work in the stock market. Not only are there thousands of publicly traded stocks in the U.S. alone, but the burgeoning exchange-traded products industry has given investors access to investing methodologies previously only available to institutions, and that includes the dividend ETF world.
Exchange-traded funds, or ETFs have given investors the ability to quickly and cheaply diversify their holdings. These products typically own a diversified basket of stocks and give the investor instant, broad exposure to a particular investing strategy. In addition, they trade in real time on stock exchanges, which gives them a leg up on traditional mutual fund, which have restrictions on when they can be bought and sold, and at what price.
ETFs are offered in all shapes and sizes, including ones that are focused on dividend investing. There is an enormous array of Dividend ETFs on the market, but not all are created equal.
Why Choose Dividend ETFs?
Like other exchange-traded products, dividend ETFs offer investors instant exposure to a particular strategy – dividend stocks, in this case – but also offer instant diversification. Indeed, the idea behind any ETF is that it gives investors exposure to many different holdings with one purchase, rather than trying to replicate the ETF’s holdings on their own. In exchange, the ETF owner takes a small fee from investors, called the expense ratio.
Dividend-focused ETFs often hold dozens of securities that would be extremely cumbersome for an individual investor to replicate. Plus, with actively managed dividend ETFs, the fund manager does the rebalancing work for the investor as time passes.
In addition to that, the main benefit of ETFs over individual stock selection is diversification. Not only does holding an ETF mean the investor can gain exposure to a wide variety of stocks all at once, but the holdings themselves typically offer diversification across industries. This, in turn, gives investors exposure to offsetting risk levels. For example, investors could choose cyclical versus defensive, or even utilize different profiles such as growth versus value, at the push of a button.
This can be quite attractive to an income-focused investor who doesn’t have the time or inclination to manage a portfolio themselves, which is why exchange-traded products have become so popular in recent years. And with very low annual expense ratios that typically beat the fees charged by traditional mutual funds, it is not hard to see why ETFs have become increasingly popular.
The diversification accomplished with ETFs can also work in an investor’s favor during market downturns, as a basket of diversified dividend stocks is less likely to decline as much as an individual stock. In other words, rather than selecting a handful of stocks to own, an ETF investor is automatically diversified, which generally helps during tough market periods, leading to potentially smaller drawdowns, as strength in one part of the portfolio can help offset weakness elsewhere.
Our Favorite Dividend ETF
Now that we’ve taken a look at why a dividend investor might want to purchase an ETF rather than individual stocks, let’s take a look at our favorite dividend ETF, the ProShares Dividend Aristocrats ETF (BATS:NOBL).
NOBL is an exchange-traded fund that was launched in October of 2013 with the goal of replicating the returns of the S&P 500 Dividend Aristocrats Index. It accomplishes this by investing in publicly traded companies that are part of the Dividend Aristocrats Index, which must be part of the S&P 500, meet certain size and liquidity requirements, and critically, have at least 25 consecutive years of dividend increases.
NOBL has a stated minimum of at least 40 stocks to be held at any time, and no single sector is allowed to account for more than 30% of the index weight. Thus, it has rules in place to ensure diversification irrespective of changes in the Dividend Aristocrats Index.
NOBL charges a fee of 0.35% over the course of a year, which is decent for a dividend ETF. Index ETFs are much cheaper, but do not offer the exposure to the best dividend stocks like NOBL does.
Indeed, the advantage of NOBL is because the Dividend Aristocrats are some of the best, most resilient income stocks available in the market today. Any company that can raise dividends for shareholders for at least 25 consecutive years has a sustainable competitive advantage, and strong recession resilience. Without those attributes, a company would not be able to continue to raise the dividend during tough economic times, and through the various business cycles that inevitably take place during a long time period.
While Dividend Aristocrats aren’t all high-yielding stocks, NOBL offers a 12-month yield of 2% currently, against just 1.4% for the S&P 500. That additional 0.6%, compounded over time, can make a significant difference in the income producing ability of an investor’s portfolio. And, NOBL is likely to be much more recession resilient than the average S&P 500 component during tough economic times.
The 0.35% fee NOBL charges is a consideration for investors, but given the multiple advantages of the ETF, it seems to be a very reasonable expense ratio.
Exchange-traded products have exploded in popularity in recent years, and while some deliberately offer narrow exposure to a specific strategy, ETFs are also very useful in instantly diversifying an investor’s income portfolio.
For investors without the time or inclination to pick their own portfolio of dividend stocks, ETFs can be a great, low-cost way to gain instant diversification, along with the benefits of owning a basket of very high-quality income stocks.
NOBL offers investors a basket of no less than 40 stocks, all with dividend increase streaks of at least 25 consecutive years. This makes NOBL our favorite dividend ETF given the Dividend Aristocrats are the best-of-the-best when it comes to dividend-paying stocks.
NOBL offers instant sector and market capitalization diversification, a current yield that is 0.6% higher than the S&P 500, and a reasonable expense ratio of 0.35%. For investors looking for an easy way to build a diversified portfolio of high-quality dividend stocks, NOBL is worth a closer look.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.