In the current environment of ultra-low interest rates, the
popularity of high-yield products has exploded. As traditional
sources of income currently offer minuscule yields, yield-hungry
investors have poured a lot of money into products with high
yields like junk bonds, MLPs, mortgage REITs and high dividend
Many of these higher income products are bundled with higher
risk. Junk bonds in particular look extremely risky as of now.
4 Excellent ETFs for Income and Stability
Dividends in Focus
Compared to other high yield products, high dividend stocks
now appear to be the best bet for yield-starved investors. Many
of the U.S. dividend payers are stable, cash-rich companies that
are likely to continue to increase their dividends. (Read:
3 Red Hot Dividend ETFs
According to a
NY Times article
, dividend payers in the S&P 500 index returned 8.92% on
average, compared with 1.83% for non-dividend stocks, with
significantly lower volatility, between 1972 and 2011.
Is Low-Volatility the Best Investing Strategy?
Low-volatility investing is no doubt one of the most popular
investing themes now-a-days. Our research has shown that
low-volatility stocks handily beat the broader markets with
significantly lower volatility in the U.S., international markets
and emerging markets, over longer periods. (Read:
Buy these ETFs for Higher Returns and Lower
No wonder the flagship product in this space, PowerShares
S&P 500 Low Volatility ETF (
) has been one of the most successful launches in ETF history and
many more products have been launched after SPLV to capitalize on
the growing investor appetite for these low-volatility
High Dividends and Low-Volatility-the Best of Both
Thankfully some new products combine the two most desirable
investment themes-high dividend and low volatility.
As the concept is relatively new in the ETF world, very little
historical performance data for the
is available. We therefore looked at the five-year risk-return
performance of the S&P 500 Low Volatility High Dividend index
and compared its performance with the broader market S&P 500
index (using monthly returns data for the two indexes for the
Over the last five years, the S&P 500 Low-Volatility
High-Dividend index substantially outperformed the S&P 500
index, with lower volatility while at the same time providing a
high level of dividend yield to the investors.
Annualized Return (5 Y)
Annualized Std.Dev. (5 Y)
S&P 500 Low Volatility High Dividend Index TR
S&P 500 TR Index (SPY)
PowerShares S&P 500 High Dividend Low Volatility
The index is composed of 50 stocks that historically have
provided high dividend yields and exhibited low volatility.
First, 75 stocks in the S&P 500 index with the highest
12-month dividend yield are chosen, with not more than 10 in any
Then, from the 75, the 50 stocks with lowest realized
volatility over the last 252 trading days are selected. Index
constituents are weighted by the dividend yield but each index
constituent is constrained between 0.05% and 3.0%, while the
weight of each sector is capped at 25%. The index is rebalanced
The ETF is heavily weighted towards Utilities (24%),
Financials (16%) and Consumer Staples (13%) sectors. The fund has
returned 10.02% year-to-date, a little higher than 9.42% for
SPY--the ETF tracking the broader market.
Launched in October last year, the fund has already attracted
about $79 million in assets.It charges an expense ratio of 30
basis points and currently has an excellent distribution yield of
3.45% and a 30-day SEC yield of 3.80%, compared with 1.92% for
Global X SuperDividend U.S. ETF (
Launched earlier this month, this ETF tracks the INDXX
SuperDividend U.S. Low Volatility Index that holds 50 of highest
yielding U.S. stocks, MLPs and REITs, in equal weights.
In order to be included in the index, the constituents should
have a minimum market cap of $500 million, meet certain liquidity
criteria and should have paid dividends consistently for the last
two years. Sector weights are capped at 25% while the cap for
MLPs is 20% of the index. Further companies should have a beta of
less than 0.85 relative to the S&P 500 to be eligible for
inclusion in the Index.
The index is rebalanced annually but the index components are
screened every quarter for dividend cuts or any negative outlook
concerning the companies' dividend policy.
The fund is currently heavily weighted towards REITs
(24%) and Utilities (24%) while MLPs (18%) round out the top
This ETF is slightly more expensive, charging the investors 45
basis points annually compared with just 30 basis points charged
The Bottom Line
By investing in low-volatility, high-dividend ETFs, income
oriented investors can enjoy higher yields and higher longer-term
returns with lower risk; however, they should be prepared for
shorter-term underperformance during strong bull markets.
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
GLBL-X SPRDV US (DIV): ETF Research Reports
PWRSH-SP5 HI DV (SPHD): ETF Research Reports
POWERSH-SP5 LVP (SPLV): ETF Research Reports
To read this article on Zacks.com click here.