Particularly in exchange traded funds form, there’s a variety of ways to skin the dividend cat. However, when it comes to index-based dividend funds, issuers often lean into one of two strategies – dividend growth or yield.
Actually, the same is mostly true across the landscape of actively managed dividend funds. When it comes to dividend growth, indexes typically measure that in terms for a how long companies within the benchmark have boosted payouts and the aim of the game is to build a basket of stocks that meet often strict consecutive dividend increase requirements.
For example, the S&P High Yield Dividend Aristocrats Index mandates that member firms have minimum dividend increase streaks of 20 years while the S&P 500 Dividend Aristocrats goes even further, requiring components to have boosted payouts for at least 25 consecutive years.
Indeed, it’s possible for dividend ETFs to set even stricter parameters than what’s mentioned above and an upcoming fund will do just that.
Introducing Dividend Monarchy
Aristocracy is nice and it’s often conflated with monarchy. In the strictest sense of the words, monarchy is “superior” to aristocracy and that’s a theme seized upon by an upcoming ETF from Roundhill Investments – the Dividend Kings ETF.
The Dividend Kings ETF, which is expected to soon launch and trade under the ticker “KNGS”, will follow the S&P Dividend Monarchs Index. The requirement for admission into that benchmark is a minimum dividend increase streak of 50 years.
“The S&P Dividend Monarchs Index is designed to measure the performance of companies within the S&P High Yield Dividend Aristocrats® that have followed a policy of consistently increasing dividends every year for at least 50 years,” according to S&P Dow Jones Indices.
As advisors know, dividend increase streaks of 50 years aren’t common, meaning KNGS lineup is likely to be small. That’s confirmed by the S&P Dividend Monarchs Index being home to just 36 stocks, according to S&P data. The index’s holdings are weighted by yield and as of the end of the third quarter, the top 10 holdings accounted for 44% of the gauge’s weight.
KNGS Has Royal Potential
Advisors also know that dividend investing is a long-term endeavor. Still, KNGS could be a well-timed addition to the dividend ETF landscape because if Treasury yields cooperate and decline, the outlook for high dividend stocks could improve in considerable fashion. Currently, the Morningstar Dividend Yield Focus Index is down 7.33% year-to-date.
Higher interest rates historically weight on high-yield sectors and that’s pertinent regarding KNGS because the S&P Dividend Monarchs Index devotes 15.5% of its weight to the rate-sensitive utilities sector.
The benchmark allocates a combined a 45.5% of its weight to the consumer staples and industrial sectors. Due to the gauge’s stringent increase streak requirement, it has no exposure energy, communications services and tech stocks.