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ETF Specialist

Finding Your Sweet Spot Along the Dividend Spectrum

Dividend strategies can look and behave differently from one another depending on how they manage the trade-off between income and dividend growth.

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It isn't hard to understand the appeal of dividend strategies. Couple historically low interest rates with increasing numbers of income-seeking retirees and it's no surprise that funds with dividend strategies have grown in popularity during the past decade. But income investors will encounter a varied landscape. At the end of January 2016, there were 469 such U.S.-listed strategies across the open-end, closed-end, and exchange-traded fund universes, with $745 billion in assets. These funds can look and behave differently from one another depending on how they manage the trade-off between current income and future dividend growth.

Dividend Growth vs. Dividend Income
Firms that pay out a greater share of their earnings have less cash to reinvest in their businesses to fuel future growth. They are also more likely to cut their dividends than those with lower payout ratios because they have a smaller buffer should earnings fall. Plus, high yields can sometimes be a sign of underlying financial distress. Dividend-income portfolio managers can--and often do--take steps to limit risk by applying fundamental analysis or quantitative screens to filter out high-risk names.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.