Neena Mishra: The ‘ultimate’ objective of any corporation is to create value for its stakeholders. In fact, one factor common among companies that turn out to be ‘great’ long-term investments is their focus on enhancing ‘shareholder value’.
Most investors focus on dividends while looking for value enhancing investments but by focusing on dividends alone, investors miss the bigger picture. Corporate actions such as buying back shares and repaying debt also create value for shareholders.
Companies that consistently generate strong cash flows can be relied upon as excellent long-term investments since they can utilize that cash to pursue investment opportunities that enhance shareholder value or return cash to shareholders.
Many U.S. companies have accumulated huge cash piles in recent years. They are likely to return more money to shareholders via dividends and buybacks. These actions enhance shareholder returns in the years to come.
Below, we present three ETFs that hold companies focused on enhancing shareholder value and thus can be excellent choices for long-term investors. (See: No Trick, Just Dividend ETF Treats for Q4)
Dividend Growth ETFs for Long-Term Outperformance
Dividend stocks and ETFs had seen a lot of interest in the past 2-3 years as investors searched for yield in the ultra-low interest environment. However they have been out of favor of late, since the taper talk started. Further, many sectors that are traditionally high dividend payers—like utilities and telecom—were punished by investors worried about the rate increase.
However investors should remember that historically more than 40% of the market returns have come from dividends. Among dividend payers, I prefer companies that have been consistently increasing their dividends in the past and have the potential to do so going forward too.
Stable, cash-rich companies that have a consistent record of increasing their dividends have outperformed the boarder market over the longer-term.
ProShares S&P 500 Aristocrats ETF (NOBL)
NOBL follows the S&P 500 Dividend Aristocrats index that targets companies that have increased dividend payments each year for at least 25 years, and meet certain market capitalization and liquidity requirements. The index weights its holdings equally and each sector’s weight is capped at 30% of the index weight.
Top sectors currently are Consumer Staples (24%), Industrials (15%), Materials (13%) and Healthcare (13%). It has minimal exposure (less than 2%) to Utilities and telecom.
The product has an expense ratio of 35 basis points and the index currently has an attractive dividend yield of 2.57%.