Pros & cons of how dividend ETFs pick stocks

Article Excerpt

Companies that pay regular and growing dividends have performed very well over time compared to broad market indices. A simple strategy capitalizing on that is to select ETFs holding stocks with a long history of uninterrupted dividend growth such as represented by the S&P 500 Dividend Aristocrats. To qualify for inclusion, stocks must have increased their dividends every year for the last 25 consecutive years. The Aristocrats fund has added 11.2% per year over the past 30 years. This compares to the 9.5% gain per year of the S&P 500 Index. Not only did the dividend payers beat the overall market, but they were also less volatile. The superior performance of the dividend growth companies is due to a combination of several factors. Companies with long histories of regular and growing dividend payments generally have competitive business models, and growing profits and cash flow. Those firms also tend to have conservative managers who make disciplined capital allocation decisions, have lower debt levels, and…

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