A High-Yield Dividend ETF with a Heavy Emphasis on Value | ETF Trends

Investors interested in boosting their fixed-income portfolio can utilize an exchange traded fund that specifically targets high-yield, U.S. dividend payers.

For instance, the WisdomTree Equity Income Fund (NYSEArca: DHS), which tracks the WisdomTree Equity Income Index, includes the highest-yielding 30% of companies taken from all dividend-paying U.S. stocks that meet minimum size and liquidity requirements. DHS shows a 3.51% 12-month yield.

As a way to minimize the potential risks of a high-yield focus, DHS weights components in proportion to the total dollar amount of dividends paid, so the ETF will tilt toward large-cap companies that typically pay out the largest amount of dividends. DHS’s market-capitalization weights include mega-caps 52.0%, large-caps 26.1%, mid-caps 13.9%, small-caps 6.2% and micro-caps 1.7%.

“Companies that pay out the largest amount of dividends tend to be large-cap companies with less volatility than a typical high-yield stock,” according to Morningstar analyst Michael Rawson.

However, Rawson warned that the focus on high yields could tilt the portfolio to distressed firms with unsustainable dividends. Additionally, the fund comes with a 0.38% expense ratio, a little high compared to other dividend-related ETFs.

Rawson also pointed out that DHS has a deep-value tilt, with a focus on financials 17.1%, consumer staples 16.1%, energy 13.5%, telecommunication services 11.2% and utilities 10.2%, which offer the most attractive yields.

More importantly, the dividend investment theme has been a time-tested strategy.

“Dividend-paying stocks have historically outperformed the market,” Rawson said. “Between 1927 and 2014, stocks that pay a dividend have beaten the total market by about 0.7 percentage points annualized. Stocks in the highest-yielding 30% of the market have done even better, outperforming by about 1.5 percentage points annualized. However, high-yielding stocks can be risky. The highest-yielding stocks have had greater volatility than the broader market because some of these stocks are distressed and may offer an attractive yield as compensation for risk.”