4 Dividend Aristocrat ETFs You Have Never Heard Of

Today, we focus on 4 ETFs specialized on dividend growth. These ETFs cater to different segments, including small-cap companies (SMDV), mid-cap firms (REGL), technology sector leaders (TDV), and global markets (FID).

The global economic downturn in 2020, described as the most significant shock in over seven decades, tested the mettle of companies worldwide. Notably, the broader market, represented by the S&P 500, experienced a modest dividend reduction of 2.7%. This contrasted with more pronounced cuts among mid-sized and small companies. Despite these challenges, certain firms within these smaller categories demonstrated remarkable durability in their dividend payments, underscoring the presence of high-quality names capable of sustaining their dividend growth streaks.

Exploring these four ETFs offers insights into options that might be under your radar but warrant attention for their dividend growth strategies:

1. Mid-Cap Dividend Growers (REGL): This ETF focuses on mid-sized companies that have consistently increased their dividends. It holds a 4-star rating from Morningstar, with an expense ratio of 0.40%.
2. Small-Cap Dividend Growers (SMDV): Targeting small-cap firms with a track record of dividend growth, this fund also has a 3-star rating and an expense ratio of 0.40%.
3. Technology Sector Dividend Aristocrats (TDV): Dedicated to technology firms with strong dividend growth histories, it comes with a neutral rating and an expense ratio of 0.45%.
4. Global Dividend Growers (FID): This ETF looks beyond domestic markets to international companies with impressive dividend growth records. It has a 4-star rating, albeit with a slightly higher expense ratio of 0.60%.

These ETFs are noted for their specialized focus, which is reflected in their relatively higher expense ratios compared to broader market ETFs. Nonetheless, they offer appealing yield potentials and are associated with higher long-term growth forecasts according to Morningstar. On average, their yields outpace those typically found in the broader market, with analysts projecting that these nimble and growth-oriented companies will outperform over time.

A deeper analysis of their performance metrics reveals a promising landscape for investors seeking growth and yield. The average yield across these ETFs stands at 3.4%, with long-term growth forecasts suggesting an average annual return potential that surpasses traditional market benchmarks. This dynamic indicates an enticing proposition for those looking to diversify their portfolios with investments that blend income generation with growth potential.

An In-depth Examination of the 4 ETFs

Looking into the specifics, we find that these ETFs draw their strategy from S&P’s indexes, each with its own criteria for dividend growth streaks to cater to different market sizes and global scopes:

• Mid-caps require a 15-year streak,
• Small caps a 10-year streak,
• Technology sectors a 7-year streak, and
• International markets a 10-year streak.

Mid-Cap Focus: ProShares S&P MidCap 400 Dividend Growers (REGL)

REGL stands out as the singular ETF targeting the S&P MidCap 400 Dividend Growers, a group of mid-sized companies achieving dividend growth for at least 15 years. These companies show a compelling average price-to-earnings (PE) ratio of 16X, compared to the S&P 500’s 20X, and a notably low price/cash flow ratio of 8.4. However, these firms often lack wide economic moats and have an average financial health rating of “B”. The absence of mid-cap tech companies with long dividend growth streaks results in zero tech sector exposure, skewing the ETF towards utilities, industrials, regional banks, and insurance firms. With fewer than 50 companies, this ETF offers a concentrated yet equally weighted portfolio, including standout firms like CSL, a dividend aristocrat with a 45-year growth streak.

Small-Cap Standouts: ProShares Russell 2000 Dividend Growers (SMDV)

SMDV is unique in its focus on top dividend-growing firms within the Russell 2000 index, emphasizing quality companies that have increased their dividends for a minimum of 10 years. This ETF exhibits a slightly higher PE than mid-caps but maintains attractive single-digit price/cash flow ratios. Its yield, at 3%, is significantly higher than the S&P 500’s, underlining its potential for investors seeking income. Despite a few wide-moat small caps, the ETF’s financial health is commendable, with a conservative 36% payout ratio. Diversification extends across various sectors, except for energy and consumer discretionary, highlighting a strategic emphasis on utilities, industrials, and financials. With a 30% turnover rate, this ETF has a dynamic portfolio of 100 companies, including several small dividend kings.

Technology Titans: ProShares S&P Tech Dividend Aristocrats ETF (TDV)

TDV caters exclusively to technology-related companies that have consistently raised their dividends for at least seven years, reflecting the sector’s newer dividend traditions. Despite a focus on slower-growing tech stocks, the ETF’s anticipated growth rate is nearly 12%, with a 2.1% yield that surpasses many growth-focused ETFs. Its portfolio is not just confined to tech; about 20% spans healthcare, industrials, communications, and financials. The ETF boasts a significant portion of companies with wide or narrow economic moats and maintains an average financial health rating of “B+”. The portfolio’s strategy involves high turnover and an equal weighting approach, featuring leading firms such as Microsoft and Visa.

Global Perspectives: First Trust S&P International Dividend Aristocrats ETF (FID)

FID explores global opportunities, filtering companies through stringent criteria including dividend growth, yield, and payout ratios, capped to ensure diversification and risk management. With a focus on the S&P Global Broad Market Index, this ETF showcases an international array of firms that have increased their dividends for at least ten years. The portfolio features exceptionally low valuations, with PE ratios below 10X and impressive yields of 6%. Although the global focus dilutes the presence of wide-moat companies, the ETF’s sectors are rich in utilities and financials, with substantial REIT exposure. Geographically, it’s diversified across North America, Europe, mature Asia, and a sprinkle of emerging markets, with specific overweights in Canada and Japan. The ETF’s strategy includes a mix of capped and market cap-weighted allocations, aiming for a balanced global dividend growth approach.

Historical Performance

Let’s examine the historical performance of each ETF since their respective inception dates, shedding light on their yield, growth and overall return potential.

ProShares S&P MidCap 400 Dividend Aristocrats (REGL)

Since its launch in March 2015, REGL has shown commendable performance with average annual returns of 11.8%, albeit slightly lagging behind the broader S&P 500 and SCHD, a favored high-yield dividend growth ETF. During recent bear market conditions, REGL demonstrated resilience, declining less than both SCHD and the broader market. Notably, from 2016 to 2021, REGL exhibited a remarkable 18.8% annual income growth, outpacing the S&P 500 significantly. Analysts project a future income growth rate of approximately 7.2% for REGL, considering risk, inflation, and tax adjustments, positioning it as a solid choice for investors seeking consistent income growth amidst market fluctuations.

ProShares Russell 2000 Dividend Growers (SMDV)

SMDV, since its inception in March 2015, has delivered an average annual return of 10.8%, reflecting the typical underperformance of small caps during bear markets. Despite this, SMDV’s dividend growth rate from 2016 to 2021 was commendable, albeit not as robust as SCHD’s performance. Future projections by analysts suggest a modest real expected income growth of around 3%, indicating a cautious outlook for SMDV’s dividend growth trajectory.

ProShares S&P Tech Dividend Aristocrats ETF (TDV)

Launched in December 2019, TDV has shown promise by closely trailing the performance of SCHD, especially noteworthy given its relatively short track record. During the pandemic and subsequent bear market, TDV’s performance was aligned with the broader market, showcasing its resilience. However, its dividend growth experienced a slight decline, highlighting the challenges of maintaining consistent income growth in the tech sector, even among dividend-growing companies.

First Trust S&P International Dividend Aristocrats ETF (FID)

FID presents a more cautionary tale, with an average annual return of just 3% since November 2013, underperforming its initial yield expectations and experiencing negative price appreciation over the years. Its performance before and during the pandemic, as well as through various market conditions, has been lackluster. FID’s annual income growth turned negative, a disappointing outcome for an ETF focused on global dividend aristocrats. Analysts project a bleak future for FID, expecting continued negative real risk and tax-adjusted income growth, making it a less attractive option for those seeking dependable income from international markets.

The historical performance of these ETFs underscores the importance of thorough analysis and selection when incorporating dividend-focused ETFs into an investment portfolio. While REGL and TDV offer promising prospects based on their past performance and projected income growth, SMDV and particularly FID show that not all dividend growth strategies yield the same results, especially in challenging market conditions. 

The Downsides of these Aristocrat ETFs

The Rebalancing Dilemma

Taking Polaris (PII) as an illustrative example, we see a company that transformed from a small-cap in 1987 to a significant player with substantial returns, outperforming the S&P 500 significantly over the decades. The crux of the matter lies in the nature of small and mid-cap ETFs, which systematically phase out their star performers as they grow, potentially leaving investors with a portfolio skewed towards smaller, less dynamic companies. This cycle of “winning out” means potentially missing out on the exponential growth phases of emerging giants.

The Insight from Bessembinder’s Study

A landmark study by Hendrik Bessembinder revealed that a tiny fraction of stocks have historically contributed to the vast majority of the stock market’s returns. This highlights the risk of missing out on these outliers in a strategy overly reliant on rebalancing, as the most explosive growth often comes from companies that can transition from small or mid-caps into large-cap dominions.

The Volatility of Dividend Income

An often-overlooked downside of aristocrat ETFs is the annual volatility in dividend income. For example, despite no aristocrats cutting dividends in 2020, certain ETFs saw significant drops in dividend income due to their rebalancing mechanisms. This volatility undermines the perceived stability that draws many investors to dividend aristocrat ETFs in the first place.

Questioning Company Quality

Aristocrat ETFs, particularly those focused on smaller companies, often end up holding many firms whose main appeal is their consistent dividend growth rather than underlying business strength. This can lead to portfolios filled with companies that offer little beyond their dividend track record, potentially impacting long-term returns.

A Better Approach to International Aristocrat Investing

When it comes to international diversification through aristocrat ETFs, the execution is critical. The First Trust S&P International Dividend Aristocrats ETF (FID) serves as a cautionary tale, suffering from several strategic missteps. A more effective approach involves a rigorous selection process focusing on single companies that are true global aristocrats with longer dividend growth streaks and broader criteria that encompass quality, safety, and valuation.