Insights


Seek Stable, Sustainable Dividend Strategies Amid Uneven Recovery

  • Q2 showed signs of economic growth while indicating the road to recovery could be volatile, as increasing consumer demand outpaces producer supply.
  • The June pullback in dividend stocks may have created a buying opportunity in the re-opening trade as positions remain underweight.
  • Dividend Aristocrats ESG UCITS ETFs now give European investors the ability to play a sustainable economic recovery in dividend stocks with a sustainable portfolio philosophy.

As covered in our latest Smart Beta Compass, we may have been early on the dividend trade in Q2 as market volatility produced mixed results, especially in June. We pointed to analyst expectations that stabilised cash flows would support dividend growth. Ultimately, it appears that recovery expectations were too positive, as fears of run-away inflation from an overheating economy or, worse, a response in monetary policy, led to intermittent volatility. 

While ETF investors putting assets into dividend stocks may have been early, these inflation fears would not suggest they were wrong. We join the consensus view that the inflation is a transitory dislocation between supply and demand as we emerge from a global lockdown. In a sense, consumers’ willingness to consume is front-running producers’ ability to re-stock the shelves, from both a manufacturing and service standpoint, thus driving pricing temporarily higher. The market is expected to digest these dislocations and allow investors to re-focus on earnings.

The current economic sentiment still provides a supportive case for dividend stocks based on recent earnings guidance, analyst projections and general optimism toward a continued economic recovery. Surveys of Consumer Confidence (US) and Economic Confidence (eurozone) had been trending positive prior to the global pandemic (see chart below). While the pandemic severely disrupted the trend, both confidence indicators have fully recovered to above their pre-pandemic trend. The latest readings on these indicators (from last week) are above where each began 2020.

Confidence Indicators Recover Pre-Pandemic Trend

espresso-dividend-aristocrats

We believe that the first half of 2021 was just the beginning and the recovery trade will continue through the end of the year. The advantage that growth stocks experience from ultra-low interest rates may be reduced if yields continue to rise as inflation picks up. We expect the gap between growth and value to continue to close. Value factor ETF exposures have seen significant reflation. Dividend yield exposures could be next to benefit from a resumption of consumer activity.

The foundational philosophy of the Dividend Aristocrats strategies has long been an explicit focus on companies with a long-term track record of stable dividends (and dividend growth). Targeting quality income from dividend stocks is considered a well-established approach to investing. With the addition of new ESG screens to the selection process, the S&P Dividend Aristocrats® ESG indices bring focus to dividend payers with sustainable/ethical business practices. This combination of sustainable investing with stable dividends comes at an appropriate time for investors seeking to increase their dividend exposure in the recovery, while also looking to increase the ESG consideration in the portfolio.

How Can Investors Navigate This Theme?

Investors should be wary to pull out too soon and not benefit from the full recovery of the global economy, as social restrictions continue to loosen. Those seeking a diversified approach to playing the recovery trade through a stable dividend strategy can now trade the SPDR® S&P® Dividend Aristocrats ESG UCITS ETFs in three regional exposures: USA, eurozone and global. 

SPDR® S&P® U.S. Dividend Aristocrats ESG UCITS ETF

SPDR® S&P® Euro Dividend Aristocrats ESG UCITS ETF 

SPDR® S&P® Global Dividend Aristocrats ESG UCITS ETF

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