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Broadly speaking, dividend stocks and funds weren’t terrible performers, but elevated Treasury yields and market participants’ affinity for mega-cap growth stocks led to S&P 500-trailing for many dividend equities.
Amid expectations that the Federal Reserve could be poised to lower interest rates multiple times this year, better things could be in store for equity income strategies. And while declining Treasury yields should be conducive to high-dividend investing, advisors and clients could be well served by continuing to focus on dividend growth.
Plenty of exchange traded funds are devoted to the payout growth cause and many use different methodologies. Some are seasoned veterans in this arena, but a new entrant could be worth considering. The Roundhill S&P® Dividend Monarchs ETF (KNGS) is nearly two months old and merits a place in the 2024 dividend ETF conversation.
Indeed, KNGS is a rookie ETF in a crowded field of payout growth funds, but it has an avenue for setting itself apart from entrenched competitors. The new ETF follows the S&P Dividend Monarchs Index, which mandates that member firms have minimum dividend increase streaks of 50 years – by far the largest requirement among competing funds.
KNGS Could Be Kingly
KNGS is the first ETF to follow the S&P Dividend Monarchs Index and that benchmark’s stout payout increase streak requirement implies a defensive posture, which could serve clients if surprises emerge this year.
“The S&P Dividend Monarchs Index consists of over 30 blue-chip U.S companies, many of which are household names, including AbbVie, 3M, and Kimberly-Clark. As of October 31, 2023, the index yielded 3.51%, offering a powerful combination of current income and potential income growth,” notes Roundhill’s Dave Mazza. “Considering there are very few companies that have been public since 1973, it is remarkable that these 30+ names have been in a position to consistently raise their dividends for such a long period of time.”
To be precise, KNGS is currently home to 36 stocks, but the point is, finding companies with dividend increase streaks of at least five decades is hard, even in the U.S. That requirement adds to KNGS’s aura of exclusivity, but more importantly, it solidifies the fund’s quality profile.
Importantly, KNGS has the potential to deliver on the promise of payout growth. Over the past 20 years, the S&P Dividend Monarchs Index notched dividend growth of 8% as member firms boosted payouts across a variety of trying market settings.
“Since 1973, the Dividend Monarchs have successfully grown their dividends through an oil crisis, the Iranian hostage crisis, Black Monday, the Persian Gulf War, the breakup of the Soviet Union, the September 11 attacks, and the bursting of the TMT bubble,” adds Mazza. “More recently, the Dividend Monarchs have grown their dividends through the Global Financial Crisis in 2008 and the COVID-19 pandemic in 2020.”
Favorable Signs for KNGS
Despite its rookie status, KNGS could experience tailwinds as 2024 unfolds. Those could include the possibility that following last year’s run-up by growth stocks that market participants will revisit value fare.
Add to that, KNGS’s emphasis on high return on equity (ROE) names could be beneficial if risk assets prove more volatile than expected this year.
“As a group, Dividend Monarchs exhibit higher return on equity (ROE) than the broader market coupled with lower earnings variability,” concludes Mazza. “Above average ROEs may indicate that the Monarchs are more efficient at generating profits from shareholders’ equity. Meanwhile, lower than average price-to-book ratios (P/B) and price-to-earnings ratios (P/E), suggest that the Monarchs may be undervalued. Characteristics of this nature have historically translated to lower share price volatility and improved drawdowns, with strong win rates over time. The reason being that over the long run, companies with low valuations combined with strong profitability offer a margin of safety to reward shareholders.”