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Approach dividend investing from a position of strength. Chasing the highest yielding stocks can lead investors to “dividend traps” and companies unable to sustain payouts. Selecting companies based on their history of paying is backward-looking and doesn’t account for their future prospects.
A Strategy for Durable Dividends
Beyond selecting companies with a high dividend yield, forward-looking assessments of a company’s current valuation and financial health are key components to the long-term durability of dividend pay-outs and growth potential.
Fair Value — Morningstar’s estimate of a company’s intrinsic value incorporates an assessment of the company’s economic moat and a projection of the sustainability of its profit potential over time. Consideration of fair value may allow for a portfolio of better valuations and greater upside potential while maintaining an attractive dividend yield.
Yield at a Better Value
As of 9/30/2020
Source: Morningstar. Index performance is not representative of fund performance. For fund performance current to the most recent month end, visit vaneck.com. For illustrative purposes only. Past performance is no guarantee of future results.
Distance to Default — Morningstar’s measure of financial health and gauge of future distress reflects a firm’s likelihood of bankruptcy and has historically been an effective predictor of dividend cuts. Selecting companies with the lowest probability of default helps reduce the probability of future dividend cuts.
Higher Distance to Default Scores Resulted in Fewer Dividend Cuts
Nov 2005 - Nov 2019
Source: Morningstar. U.S. companies in the Morningstar Global Markets Index were assigned to quartiles at the beginning of the period based on the likelihood of default using Morningstar’s Distance to Default scoring system. Those companies with the highest likelihood of default ("Very Low" Distance to Default scores) had the highest occurrence of subsequent dividend cuts. The inverse is also true. For illustrative purposes only. Past performance is no guarantee of future results.
VanEck Vectors Morningstar Durable Dividend ETF (DURA) seeks to track the Morningstar® US Dividend Valuation IndexSM, which is intended to track the overall performance of high dividend yielding U.S. companies with strong financial health and attractive valuations according to Morningstar.