U.S. investors have piled into dividend equity strategies for the better part of the last 15 years. U.S. dividend ETFs alone grew from approximately $10B in assets in 2008 to over $330B as of June 2022, according to Morningstar. We believe a dividend investing approach that considers a company’s long-term financial health and valuations may help investors strengthen their core equity portfolio through different market cycles. Here we will explore frequently asked questions about Morningstar’s approach to dividend investing and the VanEck Morningstar Durable Dividend ETF (DURA).
Q: What differentiates Morningstar’s approach to dividend investing?
A: The Morningstar® US Dividend Valuation IndexSM approaches dividend investing from a position of strength. Morningstar’s equity research team looks for more than just companies with a high dividend yield. They conduct forward-looking assessments of a company’s long-term financial health and assigns a fair value estimate to evaluate the company’s durability of dividend pay-outs and growth potential. Through this process, the index seeks to provide exposure to companies with high dividend yield that are financially healthy and trading at attractive valuations.
Q: Is DURA a dividend growth strategy or a high dividend yield strategy?
A: DURA is a high dividend yield strategy that seeks to track the Morningstar US Dividend Valuation Index, which screens and weights companies based on dividend yield. The index’s process of considering financial health and valuations help address the potential risks of investing in high yielding companies.
High dividend yield strategies focus on companies with high payouts. These strategies tend to offer higher yields than dividend growth strategies and often offer very different exposures. High dividend yield strategies tend to offer value-oriented exposure, while dividend growth strategies tend to provide blended exposure to growth and value companies.
Dividend growth strategies target those companies that have managed to grow their dividends over time. These strategies don’t necessarily seek companies with high dividends, but rather consistent dividend growth. Many investors look to these strategies because of the implied financial stability offered by companies that operate in a way that allows them to increasingly share profits with shareholders. However, selecting companies based on their dividend growth history is backward-looking. Beyond selecting companies with a high dividend yield, forward-looking assessments of financial health is a key component to the long-term durability of dividend pay-outs.
Q: How does Morningstar’s dividend investing approach incorporate financial health?
A: Investing in high yielding companies can come with risk. In some cases a company offers a high yield because shareholders demand a high share of profits due to low or even negative growth prospects. Morningstar research suggests that companies with superior financial health have cut their dividends less frequently than those with poorer financial health.
Morningstar calculates a Distance to Default score using a company’s current balance sheet and market data to gauge the company’s probability of bankruptcy. It has historically been an effective predictor of future distress and dividend cuts. Selecting companies with the lowest probability of default helps reduce the likelihood of future dividend cuts.
Q: How do valuations factor into Morningstar’s dividend investing approach?
A: Many dividend paying companies, particularly those with reliable and/or high payouts, are widely owned by income investors. As a result, many of these companies can trade at lofty valuations. Morningstar’s equity research team assigns a fair value estimate to each company it covers based on a projection of future cash flows. Their estimate of a company’s intrinsic value incorporates an assessment of the company’s economic moat and the sustainability of its profit potential over time. Based on this valuation research, the Index allocates to those companies trading at the lowest prices relative to Morningstar’s estimate of fair value. This means the Index avoids excessively overpaying for financially sound, high yielding companies, which has contributed to its historically low volatility profile relative to other high dividend yield indexes.
Q: How can DURA fit within a portfolio?
A: First and foremost, DURA has offered an attractive yield relative to the broad U.S. equity market. As investors have sought income away from traditional duration-sensitive fixed income assets, DURA offers income investors a yield alternative. Furthermore, DURA’s forward-looking approach of assessing company valuations and financial health may potentially enhance an investor’s core portfolio and provide a lower volatility equity investing experience amidst the uncertainty that is likely to remain in the market for some time. These features may provide the confidence required to stay invested in the market during difficult times—reaping the potential rewards of investing over the long term.
Q: What kind of yield does DURA offer?
A: While DURA hasn’t offered the absolute highest yield among high dividend yield strategies, its yield has consistently been competitive and above that of most dividend growth strategies and the broad equity market, as represented by the S&P 500 Index. View DURA’s current yield here.
Q: How often does DURA pay distributions?
A: DURA pays quarterly distributions.
Q: Does DURA pay qualified dividend income?
A: In order to qualify for the Index, companies must distribute “qualified income”; thus, real estate investment trusts are excluded. Historically, the vast majority of DURA’s dividends paid out to holders have been classified as qualified dividend income.
Q: How can investors buy VanEck ETFs?
A: Learn more here.
Originally published by VanEck on 24 August 2022.
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This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results, are valid as of the date of this communication, and subject to change without notice. Information provided by third-party sources are believed to be reliable and has not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of 3rd party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
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