A NOBL Endeavor: Finding Dividend Growth With ETFs In 2017

There was ample talk of slowing dividend growth last year, but S&P 500 member firms delivered 5 percent more cash to investors than they did in 2015. Still, the current environment for equities, one where some experts expect multiple interest rate hikes from the Federal Reserve this year, means it is important dividend investors understand how their exchange-traded funds work.

Typically, high dividend strategies thrive in sanguine interest rate environments, while languishing when Treasury yields climb. The alternative is for investors to embrace dividend growers from cyclical sectors in preparation of higher interest rate, but not all high dividend strategies need to be eschewed amid modest increases to borrowing costs.

Strong Year Ahead?

With $397 billion in cash dividend payments in 2016, S&P 500 companies returned 5 percent more to shareholders than the year before, continuing a seven-year trend. With investor expectations of possible changes in tax policy, including cash repatriation and reduced corporate rates, coupled with stability in commodity prices, another strong year for 2017 seems possible. There are a variety of low-cost ETFs focused on dividend growers available to investors, though as is often the case, what's inside each ETF can be different despite similarity of names, said CFRA Research in a note out Monday.

Among dividend growth ETFs, the SPDR S&P Dividend ETF (NYSE:SDY) was a winner last year, surging 20.3 percent. SDY only holds stocks that a have a minimum dividend increase streak of 20 years. Due to the fact that the energy sector has been home to the bulk of negative U.S. dividend action for over a year, the sector's weight in SDY has dwindled to just over 3 percent. Nine sectors command larger weights in the ETF than energy.

NOBL Endeavor

The ProShares S&P 500 Dividend Aristocrats ETF (BATS: NOBL) is another popular play among dividend growth ETFs. NOBL tracks the S&P Dividend Aristocrats Index, which mandates each holding has a dividend increase of at least 25 years.

That index has a lengthy track record of outpacing the S&P 500 while being significantly less volatile.

NOBL holds 50 stocks and the aforementioned consumer staples sector is NOBL's heaviest weighting (25 percent of assets), aided by stakes in Kimberly-Clark Corp (NYSE:KMB) and SYSCO Corporation (NYSE:SYY). Meanwhile, information technology (2 percent) is significantly underrepresented relative to the S&P 500 index, as the sector does not have the same long-term record of dividends, said CFRA. With a focus on S&P 1500 constituents with a 20-year record of dividends, SPDR S&P Dividend has greater exposure to small- and mid-cap companies than NOBL. The 106 holdings include more industrials (16 percent of assets) than consumer staples (13 percent). At 4 percent of assets, information technology is also underrepresented.

NOBL rose 11.6 percent last year. CFRA rates NOBL Overweight and SDY Marketweight.