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What’s In a Name? Differences in Dividend Strategies
Are all dividend strategies created equal? One look at the 16.6% year-to-date (YTD) spread between the Dow Jones Select Dividend Index and the Nasdaq Dividend Achievers Select Index suggests no, they’re not.
Tracked by two of the largest dividend ETFs, which collectively manage over $50 billion in assets, both indices are focused on U.S. dividend-paying stocks and contain the word “dividend” in their name. So why the huge divergence in performance? Because each index allocates to dividend-paying companies differently.
Broadly speaking, dividend strategies tend to focus on companies that have historically either grown their dividends (dividend growth) or paid high levels of income (yield). With an estimated yield of 5.18% YTD, the Dow Jones Select Dividend index is more yield-focused. But the Nasdaq Dividend Achievers Select Index, with an estimated yield of 1.96% YTD, is more focused on dividend growth. Historically, it’s not uncommon to see significant dispersion between different types of dividend strategies. This year’s performance so far is no different, proving that there’s more to a strategy than what’s in a name.
The lesson here from a planning perspective? Know your why. What’s your primary objective? If you’re investing for yield and income, don’t necessarily expect the return of quality dividend growth. And if you’re investing in quality dividend growth, don’t expect the higher levels of income that yield-focused strategies typically deliver.
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