Leveraging payment power through active management

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Dividend growth continues and US payouts are poised for another record high this year. For weary investors, this relief comes at a time when inflation is still going strong and the specter of broader market volatility could reemerge later this year.

While investors have long favored passive approaches to dividends, including exchange-traded funds, active management also deserves a place in the payout conversation. This is especially true for investors looking to access baskets of stocks with an enviable track record of dividend growth or names with high distributions with the resources to support those high payouts.

Active management could be all the more fruitful for equity investors under compelling payout forecasts, including what happened earlier this year when “nearly all US companies in the index (99%) have increased their payouts or held them steady, while dividends continued to be a reliable source of revenue growth for shareholders,” according to a statement published by Janus Henderson.

“Globally, first-quarter dividends jumped 11% on a global basis to a total of $302.5 billion, also a record for the quieter first three months of the year. Growth index was even stronger at 16.1% Janus Henderson’s analysis shows that dividends have more than doubled since 2009, when the index was launched,” the research firm noted.

Broadly speaking, the 2020 coronavirus bear market, albeit brief, has caused a dividend calamity, resulting in around $220 billion in global payout cuts. This negativity is still fresh in the minds of some dividend investors, indicating that there are potential breakthroughs to be made by active funds. While $220 billion is a huge number implying that no strategy is immune to this level of constraint, active managers can more easily identify companies likely to be dividend offenders than strategies based on clues.

Another benefit of active dividend strategies is that these funds can allocate more quickly to sectors with higher dividend growth prospects. Some sectors, such as consumer staples and healthcare, are known for their stability, while others – energy and utilities, for example – are known for high returns. On the other hand, the technology is still only in the early innings of its dividend story. Active management can exploit these themes.

Active ETFs exposed to the dividend factor include T. Rowe Price Blue Chip Growth ETF (TCHP)the T. Rowe Price Dividend Growth ETF (TDVG)and the T. Rowe Price Equity Income ETF (TEQI).

For more news, insights and strategies, visit our Active ETF channel.

Opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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