How Madison Dividend Value ETF invests in quality and growth.
Authored by Drew Justman, Dividend Income & Covered Call Portfolio Manager
At the end of the first quarter, there were 20 stocks in the S&P 500 with dividend yields greater than 5.3% (or 4x the index). Of these 20 companies, 12 have a dividend payout ratio (dividend divided by net income) above 80%1. When such a high percentage of a company’s earnings goes to paying its dividend, any risks to revenue, earnings, and cash flow put that dividend in jeopardy. We think the economic and industry-specific uncertainty surrounding the Trump administration’s trade policies has increased risks to high dividend payout companies in recent months. For resiliency in difficult markets, we think investors should consider dividend growth and high quality characteristics over dividend yield alone.
Payout ratio, as mentioned above, is one metric we look at when assessing a company’s ability to continue to increase dividends into the future. We like to own stocks with payout ratios in the 30%-50% range. This sweet spot provides a cushion for when revenues, earnings, and cash flow are pressured, while allowing for future dividend growth to outpace inflation when these metrics recover.
For Madison’s Dividend Value ETF (NYSE: DIVL), we first screen for above-average dividend stocks that have a dividend yield at least 1.1x the S&P 500. We track this relative yield over time, and if a stock has a high dividend yield relative to its history, it may suggest the market is worried about the company’s near-term outlook or ability to continue paying its dividend. This could be an opportunity for us to invest. Next, we analyze a company’s business model, balance sheet, and cash flow profile to assess its ability to continue paying its dividend with the possibility of consistent dividend increases in the future. Ideally, a company would keep raising its dividend in line with earnings growth. We want to find stocks that have above-average dividend yields and potential dividend increases in the future, while avoiding stocks that may have high dividend yields but face secular challenges and limited ability to raise their dividends.
A recent earnings report from Dow Inc. (DOW) is a great example of a stock with a high payout ratio that raises questions about its dividend sustainability. In February of 2025, DOW issued a quarterly dividend of $0.70. A projected annual dividend yield of $2.80 is roughly a 7.8% dividend yield, more than 4.5x the market yield (S&P 500). However, if you look past the headlines and analyze the cash flow statements for the past year, all DOW’s free cash flow was used to pay the dividend. On a longer-term basis, DOW hasn’t generated earnings per share to cover the dividend. In 2023 and 2024, DOW had earnings per share of $0.82 and $1.57, respectively, compared to annual dividend payments per share of $2.80 both years. If companies are unable to earn their dividends consistently, we don’t view the dividends as sustainable sources of income, and we avoid investing in that company.
About Madison Dividend Value ETF
- An actively-managed, high-conviction portfolio of 30-50 above-average dividend paying stocks.
- An absolute dividend yield of 2.6%, which compares favorably to the S&P 500 (1.3%) and Russell 1000 Value Index (2.1%)1.
- A growing income stream that protects against inflation. Over the past year, portfolio holdings have increased their dividends by nearly 8% on average1.
- High-quality portfolio reflected in strong balance sheets. Using Standard & Poor’s credit ratings to assess financial strength, 90% of fund holdings are rated A- or better1.
Madison Dividend Value ETF Fact Sheet – First Quarter 2025
Disclosures
1 Data as of 3/31/2025
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