Why dividend stocks should be a hot play into fall

It appears more investors are eyeing dividend stocks ahead of the Federal Reserve’s interest rate decision in September.

Paul Baiocchi of SS&C ALPS Advisors thinks it is a sound strategy because he sees the Fed easing rates.

“Investors are moving back toward dividends out of money markets, out of fixed income, but also importantly toward leveraged companies that might be rewarded by a declining interest rate environment,” the chief ETF strategist told CNBC’s “ETF Edge” this week.

ALPS is the issuer of several dividend exchange-traded funds including the ALPS O’Shares U.S. Quality Dividend ETF (OUSA) and its counterpart, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM).

Relative to the S&P 500, both dividend ETFs are overweight health care, financials and industrials, according to Baiocchi. The ETFs exclude energy, real estate and materials. He refers to the groups as three of the most unstable sectors in the market.

“Not only do you have price volatility, but you have fundamental volatility in those sectors,” Baiocchi said.

He explains this volatility would undermine the goal of the OUSA and OUSM, which is to provide drawdown avoidance.

“You’re looking for dividends as part of the methodology, but you’re looking at dividends that are durable, dividends that have been growing, that are well supported by fundamentals,” Baiocchi said.

Mike Akins, ETF Action’s founding partner, views OUSA and OUSM as defensive strategies because the stocks generally have clean balance sheets.

He also notes  the dividend category in ETFs has been surging in popularity.

“I don’t have the crystal ball that explains why dividends are so in vogue,” Akins said. “I think people look at it as if you’re paying a dividend, and you have for years, there is a sense to viability to that company’s balance sheet.”