As the Federal Reserve prepares to make a decision regarding interest rates in September, more investors are turning their attention towards dividend stocks. This move is seen as a strategic decision by Paul Baiocchi of SS&C ALPS Advisors, who believes that the Fed will be easing rates in the near future. According to Baiocchi, investors are shifting away from money markets and fixed income towards dividend stocks, especially those of leveraged companies that could benefit from a declining interest rate environment.
ALPS, the issuer of several dividend exchange-traded funds including the ALPS O’Shares U.S. Quality Dividend ETF (OUSA) and the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM), has observed that both ETFs are overweight in the health care, financials, and industrials sectors compared to the S&P 500. These ETFs specifically exclude energy, real estate, and materials, which Baiocchi considers to be highly unstable sectors in the market due to both price and fundamental volatility.
Baiocchi emphasizes the importance of selecting dividends that are durable and have a track record of growth, as well as being well supported by fundamentals. This approach is intended to provide drawdown avoidance, which is crucial for investors seeking stability and consistent returns in their portfolios. By focusing on dividends with solid growth potential, investors can mitigate risk and enhance their overall investment strategy.
Mike Akins, founding partner of ETF Action, views OUSA and OUSM as defensive strategies due to the clean balance sheets of the stocks included in these ETFs. This defensive approach aims to protect investors from market volatility and economic uncertainty, providing a level of stability that is essential in today’s unpredictable financial landscape. Akins also notes the growing popularity of dividend categories in ETFs, indicating a broader trend towards income-generating investments.
The shift towards dividend stocks ahead of the Federal Reserve’s interest rate decision reflects a strategic response to changing market conditions. By focusing on dividends with strong growth potential and stable fundamentals, investors can position themselves to weather market volatility and economic uncertainty. As the popularity of dividend ETFs continues to rise, it is clear that income-generating investments are becoming increasingly attractive to investors seeking consistency and reliability in their portfolios.