A popular strategy for a good part of 2016 was to embrace defensive, low volatility stocks and, it can be argued that dividends rarely go out of style. The combination of those themes made the PowerShares S&P 500 High Dividend Portfolio (NYSEArca: SPHD) one of 2016’s better-performing dividend exchange traded funds.
SPHD “is composed of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility,” according to PowerShares. While high dividend strategies could come under duress this year due to speculation regarding the Federal Reserve’s plans for interest rates, SPHD has the potential to remain durable.
Said another way, SPHD is not a dedicated dividend growth ETF but many of its holdings have lengthy track records of consistent payout growth and that is a good thing for investors. Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks.
That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
“While the methodology tends to focus more on high dividends than low volatility, the risk metrics show a fund that’s about 20% less volatile than the S&P 500. The beta of the fund measures somewhere between 0.7 and 0.8, depending on the time frame used. Long-term backtested portfolio statistics show about a 10% reduction in risk, looking at the historical standard deviation of returns,” according to a Seeking Alpha analysis of SPHD.
SPHD does have exposure to rate-sensitive sectors as utilities and real estate stocks combine for over 30% of the ETF’s weight. However, interest rate sensitivity is balanced out with exposure to cyclical sectors, such as industrials and technology. Those two groups combine for over a quarter of SPHD’s lineup.
SPHD “has a forward P/E of just 15 with heavier weightings to traditionally conservative areas such as utilities, industrials and consumer goods and services. These areas are overvalued compared to historical norms, again due to the demand for high dividend stocks,” according to Seeking Alpha.
SPHD charges 0.3% year and pays its dividend on a monthly basis, allowing for steadier income for income investors.
For more news and strategy on the Dividend ETF market, visit our Dividends category.