Credit: Shutterstock photoIf there is one asset class that conservative investors love to own, it’s dividend stocks. These high payout companies differentiate themselves from their growth-oriented peers by electing to return earnings to shareholders in the form of quarterly income. This presents an attractive way for retirees and other income-focused investors to participate in the equity markets as well as boost the aggregate yield of their portfolio.
Dividend stocks are unique in that their business models are generally well-established with healthy cash flow or capital financing capabilities. In some instances, these attributes can also lend themselves to lower volatility than a basket of high growth stocks focused on cash burn and product or services innovation.
Exchange-traded funds that select stocks according to dividends as a factor have become a popular and easy way for investors to access this theme. It makes for a low-cost, transparent, and flexible method to own a diversified basket of publicly traded companies with similar attributes.
One example is the iShares Core High Dividend ETF (HDV), which invests in a basket of 75 large-cap U.S. stocks with an emphasis on yield and balance sheet fundamentals in the security selection criteria. Top holdings include well-known names such as Exxon Mobil Corp (XOM) and AT&T Inc (T) in this $6.3 billion index fund.
HDV’s concentrated approach and market cap weighting methodology means that the top ten stocks currently account for 54% of the total asset allocation. This ETF currently sports a 30-day SEC yield of 3.42% and charges an ultra-low expense ratio of 0.08%.
As you can see on the chart below, it’s been a bit of a lackluster year for HDV and similar funds in the equity income class. One of the primary reasons is the outsized sector positioning in energy and telecommunications stocks, which have underperformed the broad market this year. Similarly, HDV has little exposure in the technology and consumer discretionary sectors which have been some of the top winners throughout 2017.
It’s worth noting that most of the stocks in HDV and similar indexes are classified in the value category, which has struggled to retain the same upward momentum of growth stocks. This ETF has gained just +2.55% in total return (dividends and capital appreciation) year-to-date through July 24 compared to +11.44% in the SPDR S&P 500 ETF (SPY).
One more example of a dividend portfolio having a tough year is the First Trust Morningstar Dividend Leaders Index Fund (FDL). This ETF takes a similar approach by selecting 100 U.S. stocks with a history of consistent and sustainable dividends. It shares many of the same constituents as HDV and has consummately been unable to match the pace of the S&P 500 Index in recent months.
When viewed through a global lens, the picture becomes far rosier for dividend investors. International stocks have recently experienced far stronger returns compared to their U.S. counterparts in large part due to the falling U.S. dollar. For instance, the iShares International Select Dividend ETF (IDV) has jumped +16.06% this year and just recently hit a new 52-week high.
Many investors have shunned international holdings in recent years as persistent underperformance has dogged this group. Nevertheless, the 100 stocks that comprise IDV have managed to regain some confidence as a fresh uptrend starts to unfold. It will be interesting to see if further strength and lower relative valuations among international stocks leads to further rotation away from their U.S. counterparts moving forward.
The Bottom Line
The constant reshuffling of momentum within the broad market quickly reminds us that even the most sought-after stocks can experience difficult years. Fortunately, the built-in diversification and rules-based structure of these funds allows for a high degree of transparency and a solid selection of investment choices.
Disclosure: At this time this article was published, subscribers to the Flexible Growth and Income Report owned shares of HDV.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
