For the bulk of this year, conventional wisdom has been that 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.
With dividend growth on the rise, investors poured over $10 billion into dividend ETFs last year, once again making payout funds the primary drivers of asset growth for strategic beta ETFs. [Big Year of Dividend Growth Sends Cash to Dividend ETFs]
The iShares Select Dividend ETF (NYSEArca: DVY) has previously been hampered by its large utilities exposure, but that could change now that it could be a few months, perhaps, longer before the Fed boosts rates. The $13.5 billion DVY, which yields 3.46% on a trailing 12-month basis, allocates 33% of its weight to utilities stocks. DVY’s second-largest sector weight is 12.2% to financials. [Buying Opportunity With a Favored Dividend ETF]
DVY remains alluring for income ETFs, in part due to a screening methodology that includes dividend growth and payout ratios. However, stock selection by yield could make DVY vulnerable to increased lethargy if Treasury yields continue higher. [An Old Dividend ETF Friend]
On the bright side, recent history shows dividend ETFs can whether the rising Treasury yields storm. That happened in 2013 when Treasury yields surged, but DVY turned in a solid annual performance despite those rising Treasury yields.
“The expense ratio is a bit high for my taste, but the portfolio is beautiful. From the individual companies selected to the sector allocations, there is far more to like about this portfolio than to dislike. I think some investors putting in new money might seek ways to replicate the portfolio through a combination of lower fee ETFs, but it is a testament to the design of the ETF that it would be worth looking into those strategies,” according to a Seeking Alpha analysis of DVY.
DVY’s annual fee is 0.39%, or $39 per $10,000 invested.
iShares Select Dividend ETF
Tom Lydon’s clients own shares of DVY.