Once the Federal Reserve hikes interest rates, U.S. dividend stocks and exchange traded funds could experience a meaningful correction after investors piled into the yield-paying assets during the low rate environment.
The good news is investors do not have to worry about that right now because the Fed kept its zero interest rate policy following the conclusion of its two-day meeting Thursday. That brought welcomed relief to income-generating asset classes and sectors, including rate-sensitive utilities.
The iShares Select Dividend ETF (NYSEArca: DVY) has previously been hampered by its large utilities exposure, but that could change now that investors it could be a few months, perhaps, longer before the Fed boosts rates. The $13 billion DVY, which yields 3.3% on a trailing 12-month basis, allocates 32.5% of its weight to utilities stocks. DVY’s second-largest sector weight is 12.1% to financials. [Buying Opportunity With a Favored Dividend ETF]
“If the Fed decides to not raise rates after tomorrow’s meeting, high-yielding safe sectors like utilities should outperform, as investors will scramble back into those stocks to earn that higher yield. This is important for DVY, because the fund has a weighting of almost 33% towards the utilities sector. Over the past few years this sector has rallied each time a rate increase is delayed, or when there is speculation that it will be delayed,” according to a Seeking Alpha post.
“DVY seeks to track a Dow Jones index that screens by dividend growth and payout ratios, with the stocks selected based on yield. DVY has a 0.39% expense ratio and earns favorable ranking inputs for its relatively high S&P Capital IQ Quality Rankings and relatively low S&P Capital IQ Qualitative Risk Assessments. However, a number of its largest holdings are considered overvalued by S&P Capital IQ,” said S&P Capital IQ in a research note earlier this year.