The Rise of Dividend Stocks Amidst the Federal Reserve’s Interest Rate Decision

In light of the upcoming Federal Reserve interest rate decision in September, there seems to be a growing trend among investors towards dividend stocks. Paul Baiocchi from SS&C ALPS Advisors believes that this is a wise move, as he anticipates the Fed will lower rates. Baiocchi, who serves as the chief ETF strategist, highlighted that investors are transitioning from money markets and fixed income towards dividends. Particularly, they are gravitating towards companies with leverage that could benefit from a declining interest rate environment.

ALPS, the issuer of various dividend exchange-traded funds, offers options like the ALPS O’Shares U.S. Quality Dividend ETF (OUSA) and the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM). Baiocchi pointed out that compared to the S&P 500, both these dividend ETFs have a higher exposure to sectors like health care, financials, and industrials. It is interesting to note that these ETFs exclude energy, real estate, and materials, which Baiocchi referred to as unstable sectors with both price and fundamental volatility.

Focus on Stability and Durability

According to Baiocchi, the primary objective of OUSA and OUSM is to provide drawdown avoidance. This entails seeking out dividends that are not only part of the investment methodology but are also durable and have a history of growth, underpinned by strong fundamentals. In essence, the focus is on stability and sustainability, rather than just high dividend yields.

Another perspective comes from Mike Akins, the founding partner of ETF Action, who views OUSA and OUSM as defensive strategies due to the companies’ clean balance sheets. Akins also highlighted the rising popularity of the dividend category within ETFs, pointing to a surge in interest from investors. Despite the growing trend, Akins admitted that he does not have a definitive explanation as to why dividends are currently in vogue.

The landscape of investment is constantly evolving, and as the Federal Reserve’s interest rate decision looms, investors are exploring different avenues to navigate potential market shifts. The rise of dividend stocks, particularly through ETFs like OUSA and OUSM, reflects a strategic approach towards stability, sustainability, and drawdown avoidance in an uncertain economic environment.