AAM ETF Insights--BEYOND INDEXING: UTILIZING AN ACTIVE DIVIDEND GROWTH STRATEGY FOR QUALITY EXPOSURE

Income investing is about turning steady cash flow into long -term success, a hallmark of dividend growth investing. The dividend growth segment of the ETF market, with $165Bn in assets as of 09/24/2024, focuses on stocks that have a consistent track record of growing their dividends regardless of the size of their dividend yield. This segment aims to unlock income stability and attractive total returns.

Typically, dividend growth strategies track an index comprised of companies that have increased their dividends over periods ranging from 5 years to even 50 years. However, this consistency may not be key, as this approach may overlook the strength of dividend growth and company profitability. An active strategy, unconstrained by such requirements, can potentially capture companies with a higher dividend growth rate and more attractive fundamentals, two particularly favorable characteristics as we head into a changing macro environment.

THE PROFITABILITY BACKDROP

Factor investing is an investment strategy that involves choosing companies based on a certain set of factors/ characteristics such as market beta, value, size, momentum, quality, or low volatility, to name just a few. Dividend growth indexes are touted as a segment of quality factor investing but they may actually be exposed to lower quality, sluggish dividend growers with unfavorable earnings trends. Incentives can play a role with these types of companies since executive compensation packages are usually comprised of a stock performance component. Additionally, management teams may raise dividends by a slight margin to maintain their “dividend growth” status, thus avoiding removal from indexes that have billions in assets tracking them.

When analyzing profitability fundamentals of S&P 500 dividend payers, 404 stocks in total, the differences in earnings quality is noticeable. High dividend growers have historically had higher levels of earnings stability paired with more attractive, forward-looking earnings and revenue growth.

Earnings Stability (Lower-the-Better) — Stability is measured by the standard deviation of trailing earnings per share (EPS), therefore, the lower the quartile placement, the higher a company’s earnings stability. 29 names amongst the S&P 500’s highest dividend growers currently have the most attractive level of earnings stability. Meanwhile, 41 names amongst the S&P 500’s lowest dividend growers are placed in the highest (least stable) quartile of earnings stability.

Exhibit 1: Historical Earnings Stability: Highest/Lowest Dividend Growers (S&P500 Index) Source: AAM, Ned Davis Research, As of 9/24/2024

Long-Term Projected Earnings/Sales Growth (Higher-the-Better) — Forward-looking metrics on 5-year earnings growth and sales growth, shows that high dividend growers are spread more evenly across all quartiles whereas 38 low dividend growing companies are found to be in the bottom quartile (Exhibit 2).

Exhibit 2: Long-Term Projected Earnings/Sales Growth Source: AAM, Ned Davis Research, As of 9/24/2024

Low quality, low dividend growers with lower prospects for future profitability growth may want to be avoided in an equity income portfolio altogether. High dividend growers have historically exhibited a higher level of investor sentiment given the confidence personified in their dividend policies. Relative to the lowest quartile of dividend growers, over the past 20 years, research has shown that the top two quartiles of S&P 500 dividend growers have exhibited the highest Sharpe Ratios, a measurement of returns per unit of risk (Source: Ned Davis Research, Returns of S&P 500 by Dividend Growth; 8/31/2004- 8/31/2024).

?A CHANGING MACRO ENVIRONMENT CALLS FOR A CHANGE IN DIVIDEND GROWTH STRATEGY

In September, the Federal Reserve initiated its first cut of what is being telegraphed as a new easing cycle. As investors consider re-aligning their portfolios toward equity income for this environment, note that the highest dividend growers in the S&P 500 have outperformed the lowest S&P 500 dividend growers in the 12 months and 24 months after the first rate cut (Exhibit 3).

Exhibit 3: Long-Term Projected Sales / Earnings Growth Source: AAM, Ned Davis Research

BDIV: A SELECTION PROCESS EMBEDDED IN FUNDAMENTALS & RISK MANAGEMENT

Investors may want to seek a more hands-on approach for their dividend growth strategy, especially when you consider that the infamous S&P 500 Dividend Aristocrats Index has underperformed the S&P 500 Index by a 1.90% annualized margin over the last 10 years (as of 09/24/2024). AAM Brentview Dividend Growth ETF (BDIV) actively invests in diverse dividend-paying companies, unlike traditional dividend growth indexes. Brentview Investment Management, sub-advisor to BDIV, bypasses the typical dividend track record requirement, allowing for more flexibility in the stock selection process. The strategy is rooted in bottom-up, fundamental analysis, aiming to achieve a higher dividend growth rate than the S&P 500. This makes companies with high dividend growth rates imperative to meet this objective. BDIV currently holds 83% of its assets in S&P 500 companies ranked in the top 3 quartiles of dividend growth, emphasizing this focus in practice (as of 09/24/2024).

Conclusion

As we head towards a period of rate cuts, dividend growers will likely be key for investors to meet income objectives. We believe active management for this investment focus may be the prudent course of action to achieve a balance between stable income and total return by maintaining exposure to companies with strong dividend growth rates.

This publication is provided for information purposes only. Unless otherwise stated, all information and opinions contained in this publication were produced by Advisors Asset Management, Inc. (AAM) and other sources believed by AAM to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and best interests. All expressions of opinions are subject to change without notice.

Past performance does not guarantee future results. Investing involves risk, including the possible loss of principal.

The investment objectives, risks, charges and expenses must be considered carefully before investing. The Fund’s statutory and summary prospectuses contains this and other important information about the investment company, and may be obtained by calling 800.617.0004 or visiting www.aamlive.com . Read it carefully before investing.

Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV) and may trade at a discount or premium to NAV. Shares are not individually redeemable from the Fund and may be only be acquired or redeemed from the fund in creation units. Brokerage commissions will reduce returns. Companies with high yield or payout ratio may underperform other securities in certain market conditions and reduce or discontinue paying dividends entirely while included in the index. The Fund’s return may not match or achieve a high degree of correlation with the return of the underlying Index. To the extent the Fund utilizes a sampling approach, it may experience tracking error to a greater extent than if the Fund had sought to replicate the Index. Diversification does not assure a profit or protect against a loss in a declining market.

Definitions: Dividend yield is a stock’s annual dividend relative to the stock price. Earnings per Share (EPS) is a financial ratio, which divides net earnings available to common shareholders by the average outstanding shares over a certain period of time. Sharpe Ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation. Standard Deviation is a statistical measure of market volatility that measures how widely prices are dispersed from the average price. Index Definitions: It is not possible to invest directly in an index. S&P 500 Dividend Aristocrats measures the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. S&P 500 Index (SPXT) is an unmanaged market capitalization weighted index used to measure 500 companies chosen for market size, liquidity and industry grouping, among other factors.

Not FDIC ? No Bank Guarantee ? May Lose Value

?2024 Advisors Asset Management. Advisors Asset Management, Inc. (AAM) is an SEC-registered investment advisor and member FINRA/SIPC. Registration does not imply a certain level of skill or training. AAM ETFs are distributed by Quasar Distributors, LLC. Quasar and AAM are not affiliated.

2024-1002-12026 R |18925 Base Camp Road ? Monument, CO 80132 ? www.aamlive.com