Dividend stocks are often safe havens in times of market volatility, offering the promise of regular payouts.
And stocks that regularly raise their dividends are even more attractive. That’s not just because you get more money in income each year. It’s also because the rising dividends often signal a company with strong finances.
Here are two of Morningstar’s favorite dividend-growth ETFs, both of which earn its top rating of gold.
T. Rowe Price Dividend Growth ETF
(TDVG) -)
“Manager Tom Huber has masterfully steered this strategy since March 2000,” writes Morningstar analyst Stephen Welch. “True to its name, this fund focuses on companies that are financially healthy enough to increase their dividends over time.
“As a result, Huber favors firms that generate high levels of free cash flow, an attribute that's buoyed the fund during market pullbacks. It maintains a dividend growth rate that on average is about 250 basis points higher than the S&P 500’s.”
Despite its focus on dividend growth, the fund still targets a dividend yield for the overall portfolio of 2% to 2.5%, Welch notes. That’s impressive, because when dividend payouts rise that tends to depress dividend yields.
Remember that the yield is simply the annual dividend payout divided by the share price.
Vanguard Dividend Appreciation ETF
(VIG) -)
“Vanguard Dividend Appreciation pulls in stable, profitable firms that have consistently increased their dividends for over a decade,” writes Morningstar analyst Bryan Amour.
“Targeting stocks with 10 years of dividend growth is a strict hurdle that provides a big advantage,” he says says. “It indirectly targets profitable companies that not only have the capacity to increase their dividend payments but also a willingness to do so.”
The fund tracks the S&P US Dividend Growers Index, but it eliminates the highest-yielding names from that cohort to ensure its holdings are financially stable.
“Its established constituents insulate the portfolio from volatility and should lead to a long-term risk-adjusted advantage,” Amour says.
A Hidden Gem
Meanwhile, Barron’s cites a company you’ve probably never heard of that has increased its dividend for 50 straight years: RPM International (RPM) -). It makes paints, coatings, and adhesives.
The company calculates that an investor buying $1,000 of its stock 50 years ago and reinvesting the dividends would now be sitting on $1.15 million. That compares to $178,000 for the S&P 500 index.
RPM benefits from economic growth around the world, as it has sales in more than 160 countries, Barron’s points out.
“You can see that in highway construction, you could see that in the onshoring of manufacturing, you can see that in some expansion in airports,” Chief Executive Frank Sullivan said in the company’s October earnings call. “We see that having a pretty good runway” for the next 1½ to two years.
The author owns shares of Vanguard Dividend Appreciation ETF.
