For risk-aware investors looking to participate in the US equity market for both income and total return, quality dividend payers are a compelling route. Comparing the constituents of the Morningstar US Dividend Opportunity Index to the Morningstar US Market Index, a broad gauge of US equities, helps tell the story.
The Dividend Opportunity Index includes shares of dividend-paying companies with durable competitive advantages in the eyes of Morningstar Equity Research, as well as strong growth and high-quality characteristics. The dividend index’s sectoral composition varies significantly from a US equity market comprised of nearly 43% in the technology and communications services sectors and the two largest holdings, NVIDIA (NVDA) and Microsoft (MSFT), representing nearly 13% as of August 29.
The US Dividend Opportunity Index currently devotes more weight to the energy, financials, industrials, and healthcare sectors. The index is also underweight tech and less top-heavy than the broad market. The index underpins the recently introduced Franklin U.S. Quality Moat Dividend ETF (FDIV) from Franklin Templeton Canada.
The US Equity Market Through a Quality Dividend Lens
Dan Lefkovitz, Index Strategist, Morningstar Indexes, said:
“Dividend-paying stocks are a great way to invest for both income and capital appreciation, but it’s important to manage the risk of yield traps. Adding a quality screen through Morningstar’s Moat rating can help investors find competitively advantaged companies with sustainable, even growing, dividends.”
Ahmed Farooq, SVP, Head of Retail ETF Distribution, Global ETFs, Franklin Templeton Canada, said:
“As part of the index underlying FDIV, our new ETF, Morningstar’s Moat rating allows us to filter dividend-paying companies with durable competitive advantages. Using Moat, FDIV takes a holistic view of the company, combining dividends and quality or a solid total return approach.”
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