In theory, these should be go-go days for high dividend exchange-traded funds. After all, many high dividend sectors, such as consumer staples and utilities, are considered defensive and the current market climate is conducive to playing defense. In reality, many high dividend ETFs are floundering due in large part to significant exposure to the energy or real estate sectors or both.
For example, the yield-driven Morningstar Dividend Yield Focus Index is off 27.54% year-to-date and devotes almost a quarter of its weight to energy stocks. Good thing it excludes real estate stocks.
Issues with high dividend strategies may be confounding investors, but they’re easy to explain, even at a time when 10-year Treasury yields reside below 1%. First, the energy sector is awash in negative dividend action, i.e. cuts or suspensions. Second, that trend could matriculate to real estate, a group pounded by closures of hotels, malls and retail stores at the hands of the novel coronavirus.
With those factors to avoid in mind, let’s examine some of the high dividend funds that can provide investors income and defensive positioning in today’s volatile market. Such high dividend ETFs include:
- Legg Mason Low Volatility High Dividend ETF (LVHD)
- VictoryShares US Large Cap High Div Volatility Weighted ETF (CDL)
- Xtrackers MSCI EAFE High Dividend Yield Equity ETF (HDEF)
Legg Mason Low Volatility High Dividend ETF
Expense ratio: 0.27%, or $27 annually per $10,000 invested
The Legg Mason Low Volatility High Dividend ETF offers at least two traits investors are craving these days: reduced volatility and higher payouts. Investors considering LVHD should remember an important trait about low volatility ETFs. While these funds are designed to perform less poorly than traditional equity offerings in bear markets — something LVHD is doing — that doesn’t mean there’s zero downside capture involved.
Hence, LVHD is generating negative returns this year, but it is performing less poorly than the S&P 500 (.SPX). The fund tracks the QS Low Volatility High Dividend Index and the has some avenues for avoiding dividend offenders, namely screening for profitable companies with high but sustainable yields.
LVHD does allocate almost a quarter of its combined weight to the real estate and energy sectors, but with none of the fund’s 82 holdings exceeding weights of 2.81%, single stock risk is relatively small in this fund.
LVHD’s yield of 3.36% is high by today’s standards for equity funds, but no so high as to imply the ETF holds a basket chock full of likely dividend offenders. It doesn’t.
VictoryShares US Large Cap High Dividend Volatility Weighted ETF
Expense ratio: 0.35%
The VictoryShares US Large Cap High Div Volatility Weighted ETF doesn’t get a lot of fanfare among high dividend ETFs, but the fund is nearly five years old and has over $207 million in assets under management. CDL targets the Nasdaq Victory US Large Cap High Dividend 100 Volatility Weighted Index. While its name may imply that it’s similar to the aforementioned LVHD, the VictoryShares fund has its own unique traits. CDL offers some flexibility rather strict adherence to a methodology, which can lead to yield-driven strategies that are reliant on a small number of securities.
Additionally, CDL features no exposure to real estate stocks and as a value fund, the ETF’s weight to financial services — 22.84% — is high. That’s a risk with interest rates being low, but the benefit is that many dividend payers from that sector aren’t burdened by their payouts and are likely to increase those rewards this year.
With a less than 8% weight to energy names and no real estate exposure, the bulk of CDL’s yield opportunity is derived from a 20.32% utilities allocation, which is nearly triple that of the Russell 1000 Value Index. The VictoryShares ETF yields 3.23%.
Xtrackers MSCI EAFE High Dividend Yield Equity ETF
Expense ratio: 0.20%
International equities aren’t offering investors much shelter from rough waters this year, but those struggles are presenting investors with a compelling entry point with the Xtrackers MSCI EAFE High Dividend Yield Equity ETF and its tempting 4.77% dividend yield.
Fortunately, HDEF’s energy weight is low at 4.65% and the integrated oil companies residing in this fund are cutting spending rather than dividends. The high dividend ETF’s largest geographic exposure is the U.K. at 24.64%. That should be a benefit as payouts there should be steady this year, which is to say big growth may not happen due to coronavirus hindering the global economy, but FTSE 100 dividend payers are looking more attractive on valuation.
HDEF also allocates 11% of its weight to Japan, a country that should deliver modest if not solid dividend growth this year.
The headwind for HDEF is its 22.11% weight to financial services stocks. Central banks in markets outside the U.S. are going to near or sub-zero interest rates, punishing lenders’ margins in the process. Under that scenario, HDEF components need the global economy to rebound and lending activity to pick up to foster confidence among investors.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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