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Harnessing The Power Of Dividends

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There are two potential sources of return for common equity: price appreciation (capital gains) and dividend income. Dividends tend to be a much more predictable source of return than capital gains (although not all companies pay them), so it’s no surprise they’re often a sought-after feature for investors.

Dividend-focused investing strategies invest in dividend-paying companies. These companies represent a significant portion of the global equity market and span across all sectors, providing great opportunities for diversification.

Let’s take a look at what’s behind the power of dividend-focused investment strategies, exploring the benefits, downfalls and potential to achieve better risk-adjusted results.

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ETFs and dividend strategies

As ETFs grow in number and popularity, so does the number of dividend-focused strategies in the space. Historically, dividend ETF investing has been dominated by two strategies:

  1. Invest in companies with high dividend yields in hopes of providing outsized income and long-term benefits of historical outperformance of dividend payers.

The downside: Many investors have learned that high yields may not be sustainable and can be red flags, indicating declining stock price and potential issues within a company, which can lead to a number of negative outcomes for investors.

  1. Invest in companies with growing dividends with the assumption that dividend growth trends will continue and with them the expectation of capital gains associated with dividend growers.

The downside: This option can sacrifice the opportunity for higher dividends provided by a high-yield strategy mentioned above. Also, a focus on historical dividend growers might ignore fundamentally attractive companies that are: newer, have smaller capitalization, or have just started transforming their strategy into a dividend-paying model.

With these two dividend strategies, investors are forced to make a mutually exclusive decision to either chase high yields or purchase dividend growth stocks. But, ultimately, neither strategy provides the full breadth of benefits of dividend investing.

RBC Quant Dividend Leaders ETFs: The best of both worlds

Instead of forcing investors to choose one strategy or the other, RBC Quant Dividend Leaders ETFs offer the best of both worlds: the growth potential of a dividend-growers portfolio, combined with the attractive income of a high-dividend portfolio.

In order to achieve this objective, RBC Quant Dividend Leaders ETFs incorporate a number of strategic choices:

  1. Filter for attractive dividend yields relative to peers.
  2. Carefully analyze fundamental factors in order to identify companies that may be able to potentially grow dividends, and weed out those that may be unable to continue paying them.
  3. And, unlike many other dividend strategies, include small-, mid- and large-cap names, leaving no ‘income opportunity stone unturned’ to provide broad diversification by both sector and cap size.

Today’s investors want both an attractive monthly income stream that has the ability to grow over time, and long-term capital growth from a diversified portfolio of good quality, stable dividend-paying companies. RBC ETFs offer a strategic, well-thought-out solution that uses forward-looking factors designed to provide these characteristics.

To learn more about the benefits of ETF investing, talk to your financial advisor.

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