An array of dividend-themed exchange traded funds have gotten relief this year as the Federal Reserve has held off on raising interest rates, particularly those funds emphasizing high yield asset classes and sectors.
The PowerShares High Yield Equity Dividend Achievers Portfolio (NYSEArca: PEY) is one of those ETFs, but there are signs that this fund can remain durable relative to some other high-yield dividend options.
Stocks with steady dividend yields reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.
Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends. [Read more: Fight Inflation With Dividend ETFs]
The potentially unsustainable dividend payouts in the energy sector could pressure more so-called high dividend ETFs that weigh components based on payouts.
“PEY follows the Nasdaq U.S. Dividend Achievers Index, which selects companies based on a combination of dividend growth and yield. This ETF holds 50 companies with over 42% of the fund’s combined weight allocated to the utilities and energy sectors,” according to InvestorPlace.
Dividend growers provide an aspect of quality and growth since these firms have a long track record of raising dividends.[related_stories]
Companies that have consistently raised dividends also exhibit stable balance sheets and consistent earnings growth. And SDY provides consistent dividend growth via its underlying index, which mandates member firms have dividend increase spanning at least 20 years.
Company stocks that issue high yields may be masking their distressed books or may not be sustainable and are heading for dividend cuts. On the other hand, these quality dividend ETFs try to limit the impact of these value traps by selecting components based on a history of sustainable dividend growth.
“Another interesting element to PEY is that although it only holds 50 stocks, its weight spreads out well through the various market cap spectrums. For example, PEY devotes nearly 24% of its weight to small-cap stocks and 41% to mid-cap stocks. Those are large allocations to mid-caps and small-caps relative to other dividend ETFs that are not exclusively devoted to those types of stocks,” adds InvestorPlace.
PEY yields nearly 3.3% on a trailing 12-month basis and costs 0.54% per year.
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PowerShares High Yield Equity Dividend Achievers Portfolio
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.