It’s usually around the 2nd half of December that you start seeing all of the market forecasts roll in for the new year. I’m no different and I’m going to begin publishing my “top picks for 2024” over the next few weeks starting with the one group that investors are usually most interested in - dividend stocks & ETFs.

2023, however, hasn’t been the year for dividend payers. Growth, tech & high beta controlled the first half of the year as the highly-anticipated recession never materialized. Then, they got a second wind in the second half of the year when the Fed finally paused the interest rate hiking cycle. Dividend stocks tend to be more defensive-oriented and overweighted to cyclical sectors, such as financials and industrials. Neither of those groups spent any extended period of time in the market’s favor and dividend stocks have lagged badly throughout the year.

The good news is that the landscape for dividend payers might be quite different in 2024. While there was little need for defense when tech stocks were generating returns of 50%+, the economic landscape looks like it could soon grow significantly more challenging.

• Europe is teetering on the brink of recession since the ECB may have overtightened.

• The housing market, which has been one of the bedrocks of U.S. growth over the past couple of years, looks like it’s finally slowing down with median new home sale prices down more than 15%.

• The jobs market, which has been one of the firmest sources of support for the economy, is moderating and could potentially start losing jobs soon.

• The impact of higher interest rates and a struggling manufacturing sector has already led to a spike in corporate bankruptcies.

Clearly, there are some hurdles to overcome. The major brokerage houses are all forecasting further gains for stocks in 2024, but I’m a little less optimistic. If the recession finally hits, we could see another drawdown in the first half of the year, but a rally in the second half when investor sentiment bottoms out.

Most top dividend ETF articles focus on just a handful of big names, including the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG). We’re guilty of covering those names frequently as well, so my top dividend ETF picks for 2024 are going to focus more on below-the-radar funds. There are some very solid dividend ETFs that don’t get a lot of attention, so let’s shine a little more light on them here.

Without further adieu…

SmartETFs Dividend Builder ETF (DIVS)

DIVS has one of the smartest portfolio construction strategies in the dividend ETF space as well as a stellar track record, which makes it all the more curious why it’s managed to attract just $30 million in assets.

DIVS may be categorized as a dividend growth ETF since it focuses on companies that have grown their dividend in the past and are expected to continue doing so into the future. In reality, it’s more of a dividend quality strategy. The management team (DIVS is actively-managed, which is another unique feature in this space) looks for companies with strong cash flow histories over the past 10 years, healthy balance sheets with low debt levels and trade at attractive valuations. Within that universe, roughly 35 stocks are selected and equal-weighted to produce the final portfolio.

What investors get is a portfolio primarily made up of large-caps that’s roughly 60% U.S. stocks and 40% international stocks. It also tilts heavily towards cyclical and defensive sectors with a splash of tech exposure to round it out. It comes with a 5-star rating from Morningstar, but only yields a modest 1.4%.

Why This ETF Is A Top Pick

This ETF offers all of the exposures that tend to lead into an economic recovery. If the economy succumbs to recession, the large-cap, quality and defensive factors should mitigate some downside risk. During the recovery, the value, cyclical and international exposures could take over and generate additional outperformance. Essentially, the portfolio is positioned to potentially do well in both down and up markets. The active management ensures the portfolio remains nimble and rotates into the best opportunities.

ALPS O’Shares U.S. Small Cap Quality Dividend ETF (OUSM)

If you’re a fan of Shark Tank, you’ll be very familiar with Kevin O’Leary. O’Shares is his investment management firm. OUSA has all of the things that investors could want in a diversified dividend portfolio.

Its underlying index identifies small-cap companies with exposure to the following four factors: 1) quality, 2) low volatility, 3) dividend yield and 4) dividend quality. The low volatility and high yield components are fairly self-explanatory. “Quality” is measured by balance sheet strength and strong profitability. “Dividend quality” is measured by the presence of a sustainable payout ratio and a history of dividend growth. Initially, qualifying components are weighted by market cap and then tilted according to the strength in the four factors. Consideration for diversification and overweights are also considered.

As the fund’s name suggests, it’s comprised entirely of U.S. stocks, but it’s tilted heavily towards a combination of financials, industrials and consumer discretionary stocks, which account for a full 2/3 of the portfolio. It currently offers a yield of 1.7%.

Why This ETF Is A Top Pick

Small-caps have been beaten down and unloved for a while, but at some point that changes. We’ve started to see the “magnificent 7” mega-cap stocks running out of steam over the past month, which opens the door for non-large-cap tech to begin outperforming again. In 2022, we saw small-caps pretty much keep pace with the S&P 500 and that was due to value & dividend stocks keeping the index propped up. I think that helps limit downside in the next correction as value stocks should, in theory, outperform again. The rebound, however, is where this portfolio could shine. In economic recoveries, it’s usually value and small-caps that lead on the way back up. This ETF has plenty of both.

First Trust Dorsey Wright Momentum & Dividend ETF (DDIV)

DDIV is another tiny dividend ETF that slides under-the-radar, although the Dorsey Wright momentum strategies are well-known within the industry. Its value tilt could be the shining star for this fund in the coming year.

While it’s not clear just by looking at the name, DDIV is mostly a mid-cap high dividend yield portfolio. After applying some simple liquidity and tradability screens, each stock is assigned a relative strength score based on its forward price momentum compared to the momentum of a broad market benchmark index. Those with good relative strength make the initial cut. The top 50 highest dividend yields make the final portfolio and qualifying components then get weighted by dividend yield.

DDIV has a pretty good mix of large-, mid- and small-cap names, but is very heavily tilted towards cyclicals. More than 60% of the fund is invested in financials and energy names with another 9% going to industrials. This is a portfolio that will be very sensitive to the current economic cycle (in other words, it underperforms badly in a contraction, but does well in a recovery). DDIV trades at about 12 times earnings and currently yields around 3%.

Why This ETF Is A Top Pick

I’m admittedly a little unsure about how the focus on high yielders plays out since high yield performed so poorly this year. The cyclical overweight and tilt towards smaller, value-oriented names wins out for me though. You’re probably sensing a theme with my preference for funds with lots of value and cyclical exposure, anticipating a 2nd half rally. DDIV’s momentum strategy should keep the fund invested in the areas that are in favor.

Pacer Global Cash Cows Dividend ETF (GCOW)

There may not be a greater success story in the ETF industry over the past few years than Pacer. While the issuer is mostly known for the Pacer U.S. Cash Cows 100 ETF (COWZ), it actually boasts an impressive lineup of nearly 50 ETFs, including its expanded cash cows lineup, its Trendpilot roster (which considers share price moving averages) and other thematic products. GCOW, however, is pretty impressive in its own right.

GCOW follows the same free cash flow strategy as COWZ, but applies it to the global equity universe. Once it identifies the top free cash flow yielders, the final criteria is to identify the top yielders within that subgroup and weight the 100-name portfolio by dividend yield (COWZ weights by free cash flow instead).

As you might expect, the fund has a 2/3 weighting to international stocks. It also tilts towards cyclicals and defensive sectors and produces an impressive yield for a diversified equity portfolio, currently more than 5%. If you like value stocks, you’ll love GCOW. It currently trades at a P/E ratio of under 7.

Why This ETF Is A Top Pick

This is the most internationally-focused of the funds on this list and, while that won’t appeal to a lot of U.S. investors, there’s undeniable opportunity here. International stocks have been lagging U.S. stocks for most of the past 15 years, but that trend won’t last forever. It leans towards the areas of the market that should do well in a recovery, it’s got an impressive yield and the high value lean should protect against some downside. The free cash flow strategy has had a high degree of success over the long-term and it should again whenever fundamentals and quality matter.

Conclusion

My 4 top dividend ETF picks for 2024 cover an array of strategies and factor tilts, which you can see below.

DIVS rates highly in both quality (RMW) and conservative investment (CMA). OUSM has an obvious small-cap lean (SMB), but rates strongly in quality as well. DDIV is very value-oriented (HML), while GCOW has a significant factor loading to conservative investment as well.

My overall theme of my picks is that I believe recession will start to make an appearance in the 1st half of the year, but stocks will lead it on the way down. Once the Fed begins cutting rates next year and sentiment bottoms out, equities likely begin staging a recovery, which, historically at least, has been led by value and cyclical stocks.

Even if that narrative doesn’t play out. These ETFs are well-constructed and can make a nice addition in almost any portfolio.