Dividend Stocks Are a Hot Play as the Fall Season Approaches

Investors are increasingly turning their attention to dividend stocks as they anticipate the Federal Reserve’s upcoming interest rate decision in September.

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Paul Baiocchi, a key figure at SS&C ALPS Advisors, believes that this shift in strategy is well-founded, especially as he predicts the Fed might ease rates. “Investors are gravitating back toward dividend stocks, moving away from money markets and fixed income, and significantly, toward leveraged companies that stand to benefit in a declining interest rate environment,” Baiocchi, who serves as the chief ETF strategist, shared during an appearance on CNBC’s “ETF Edge” this week.

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ALPS Advisors manages several dividend-focused exchange-traded funds (ETFs), including the ALPS O’Shares U.S. Quality Dividend ETF (OUSA) and its small-cap counterpart, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM).

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Both of these ETFs are overweight in sectors like health care, financials, and industrials when compared to the broader S&P 500 index, according to Baiocchi. Notably, they exclude sectors such as energy, real estate, and materials, which Baiocchi considers to be among the most volatile in the market.

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“These sectors not only exhibit price volatility but also fundamental volatility,” Baiocchi explained. He emphasized that this kind of instability could undermine the core objective of the OUSA and OUSM ETFs, which is to help investors avoid significant drawdowns.

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In terms of strategy, Baiocchi noted, “The goal is to focus on dividends as part of the methodology, specifically dividends that are durable, have been consistently growing, and are well-supported by strong fundamentals.”

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Mike Akins, a founding partner at ETF Action, also weighs in on the conversation, highlighting that both OUSA and OUSM can be seen as defensive strategies due to the generally strong balance sheets of the companies within these ETFs.

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Akins also pointed out the growing popularity of dividend-focused ETFs. “I can’t predict exactly why dividends have become so popular,” Akins said. “But it seems that people perceive a company that consistently pays dividends as having a solid and viable balance sheet.”

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In summary, as investors brace for the Fed’s next move, dividend stocks are gaining favor for their potential to offer stability and income, particularly in a potentially easing rate environment. The focus on durable and growing dividends, as exemplified by the ALPS O’Shares ETFs, reflects a broader trend toward defensive investment strategies in uncertain times.

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