Remember the Tom Clancy novel turned movie Clear and Present Danger? It’s not a stretch to say that’s the current state of affairs facing equity income investors as it relates to the S&P 500.
The dividend yield on the benchmark domestic equity gauge recently slipped to its lowest levels on record. Want to tap a basic ETF tracking the index? You’ll be treated to a scant dividend yield of 1.04%. Of course, the good news is that the S&P 500’s yield is at rock-bottom for a reason: The index continues rising.
Still, 1.04% isn’t going to cut it for many clients, particularly those in retirement and or those close to it. Those seasoned investors are apt to remember a time when the S&P 500 yielded around or north of 3% and it was never a cause for alarm. Fortunately, there’s a plethora of dividend ETFs to consider when it comes to enhancing clients’ income prospects.
The newly minted Amplify S&P 500 Dividend Drivers ETF (DRVR) should be part of that discussion. Let’s explore why that’s the case.
Get in the DRVR’s Seat
For some dividend investors, the S&P 500’s current state harkens another Tom Clancy novel: The Sum of All Fears. Things don’t need to be that way and DRVR eases the equity income burden.
The ETF, which debuted in July, tracks the S&P 500® Dividend Drivers Index. Though member firms must have payout increase streaks of at least 10 years, the index doesn’t focus on yield or increase streaks alone. Rather, the gauge focuses on the traits that make dividend stocks “strong dividend stocks.”
“Eligible companies are then selected using a composite score that combines three fundamental measures: five-year dividend growth, 12-month forecasted dividend yield and return on invested capital (ROIC). Final index weights are then determined based on each constituent’s 12-month forecasted dividend yield,” according to S&P Dow Jones Indices.
So with DRVR, advisors and clients get smatterings of yield and consistent dividend growth overlaid with quality protections that can are supportive of long-term payout growth, and, potentially, share price appreciation.
Where’s the Yield?
Clearly, it’s not hard to beat the S&P 500’s dividend yield and while DRVR is a new ETF, chances are the fund will serve up a yield in excess of the parent index.
“Across the full back-tested period, the S&P 500 Dividend Drivers Index had an average dividend yield of 3.06%, significantly higher than the S&P 500’s 1.76%,” adds the index provider. “With the S&P 500’s current yield at 1.10% and well below its historical average, the S&P 500 Dividend Drivers Index’s current yield of 2.99% stands out in today’s low-yield equity market environment.”
(Image: S&P Dow Jones Indices)
Importantly, the test of DRVR’s index also revealed dividend growth that beat the S&P 500 and the Consumer Price Index (CPI), meaning this new ETF could shape up to be a valuable inflation flight for prescient investors. Those attributes are as thrilling as a Tom Clancy novel.
DRVR’s “index modestly outperformed the S&P 500 over the back-tested period and exhibited significantly higher dividend yield, dividend growth and profitability,” concludes S&P. “Overall, these results suggest that incorporating multiple drivers in the selection process led to both differentiated performance outcomes and distinct index characteristics relative to the benchmark.”
