After the recent market swings, many are wary of volatility ahead. Nevertheless, investors who still want high dividends but are also concerned about ongoing risks may turn to low-volatility, high dividend ETF strategies.
“Investors can buy ETFs to get income from dividends, (often above what they could generate from individual stock picking), risk management for market volatility (potential for smoother returns with less downside risk) and long-term equity appreciation (if the stocks meet historical expectations),” writes Rick Genoni, managing director and head of ETF product management at Legg Mason, for InvestmentNews.
After a three-decade long decline in interest rates, we are still seeing historically low yields in traditional fixed-income assets, and bonds will continue to be pressured as interest rates rises.
However, the old income-generating assets, like Treasuries and utilities, may no longer adequately meet investor’s growing income needs. On the other hand, many are loath to take on riskier investments as volatility remain a fresh scar.
Consequently, Genoni argues that investors can turn to ETF options that deliver dependable income without carrying to much risk, such as high-dividend, low-volatility ETFs.
“Neither is new to the scene: Dividend funds are among the fastest growing in the smart beta space, while low volatility funds have become the second-largest attractor of assets under management for the three-year period ended Sept. 30,” Genoni said. “They are designed to address investor needs for income-generating assets with the potential for growth above inflation, combined with lower volatility and improved diversification.”
Legg Mason is putting the final touches on a suite of smart-beta ETFs, including the Legg Mason Low Volatility High Dividend ETF. The Low Volatility High Dividend ETF, like the name suggests, targets high dividend yield companies, with a lower price and earnings volatility. Specifically, companies must demonstrate profitability over the pas four fiscal quarters, and stocks whose yields are not supported by earnings are excluded. [Legg Mason Crafting Four Smart-Beta, Index-Based ETFs]
Genoni also pointed out that dividend-paying stocks have historically exhibited lower sensitivity to the broad market or exhibit lower volatility, which can lead to lower drawdowns in a declining market. Additionally, investors may still capitalize on equity risk premium as dividend stocks typically provide higher-than-inflation growth.
While the Legg Mason Low Volatility High Dividend ETF has not hit the market yet, investors can take a look at the PowerShares S&P 500 High Dividend Low Volatility Portfolio (NYSEArca: SPHD) in the meantime. SPHD takes 50 S&P 500 stocks that have historically provided high dividend yields and low volatility. The PowerShares ETF has a 3.47% 12-month yield.
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.