Equities have jumped some major hurdles and broke new highs, but the markets are running out of steam after a multi-year bull rally and still face some challenges ahead. Consequently, investors should consider high-quality stock exposure, such as exchange traded funds that track dividend growers, as a way to limit risks while participating in any upside potential.
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In recent weeks, U.S. stocks have pushed higher on a better-than-expected second quarter earnings season. U.S. valuations, though, are beginning to look pricey, so any further gains in equities will have to be supported by earnings growth.
"We believe further gains require a meaningful improvement in corporate earnings, particularly in developed markets," BlackRock
“Stocks can still climb, provided EPS continues to recover and inflation remains subdued,” Sam Stovall, Managing Director and U.S. Equity Strategist at S&P Global Market Intelligence, said on a recent webcast
The stock market still faces a number of headwinds that could cause another risk-off event and trigger another major sell-off.
"High U.S. valuations and strong flows into U.S. equities already appear to reflect part of the good news. A U.S. market overweight has become a consensus trade, our analysis shows, raising the risk of sudden reversals," according to BlackRock.
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For instance, Stovall pointed to a so-called Wall of Worry that could shake investment sentiment, including an aging bull market, an earnings recession, a Federal Reserve rate hike, volatility in the equities market, depressed oil prices, lone-wolf terror attacks, an upcoming U.S. presidential election and a post-Brexit environment.
Consequently, during periods of heightened uncertainty but continued slow growth, investors may seek out more sturdy or stable companies.
“Investors tend to favor stocks with above-average consistencies of raising EPS and dividends during challenging times,” Stovall said.
Investors may also consider consistent dividend growers as a way to gain exposure to this group of quality companies as dividend growers and high quality stocks share a number of similar characteristics.
"We prefer quality companies that can increase earnings in a low-growth
environment or grow their dividends," BlackRock analysts said. "U.S. stocks with high dividend payouts, by contrast, look expensive and offer limited earnings potential at this time, we believe."
ETF investors can also target U.S. dividend growers through a number of options. For instance, the iShares Core Dividend Growth ETF (NYSE:DGRO
The Vanguard Dividend Appreciation ETF (NYSE:VIG
The Schwab US Dividend Equity ETF (NYSE:SCHD
The PowerShares Dividend Achievers Portfolio (NYSE:PFM
The SPDR S&P Dividend ETF (NYSE:SDY
The ProShares S&P 500 Aristocrats ETF (NYSE:NOBL
Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
Full disclosure: Tom Lydon’s clients own shares of NOBL, SDY.
This article was provided by our partners at etftrends.com