The recent uptick in volatility for growth stocks, namely technology and Internet names, could encourage investors to consider more conservative fare. That theme could benefit exchange traded funds such as the First Trust Morningstar Dividend Leaders Index Fund (NYSEArca: FDL).
FDL tracks the Morningstar Dividend Leaders Index. That index “captures the performance of 100 highest yielding stocks that have a consistent record of dividend payment and have the ability to sustain their dividend payments,” according to Morningstar.
The $1.76 billion FDL, which holds nearly 100 stocks, has a trailing 12-month dividend yield of 3%. That is well above the comparable yield on the S&P 500 or 10-year U.S. Treasuries.
“Strategy-wise, this is a great fund for investors seeking a strong dividend yield. It also requires investors to understand that the holdings can shift substantially over time. If I were investing in FDL, this is something I’d keep in mind and would want to be comfortable with. All things considered, if this fund were to drop its expense ratio materially, this would easily go on my top dividend ETF list. Until then, it is ideal as a source of dividend ideas,” according to a Seeking Alpha analysis of FDL.
Identifying reasons for FDL’s above-average dividend yield is not difficult. The ETF features significant exposure to several high-yielding sectors. For example, the consumer staples, telecom and utilities sectors combine for about half of the ETF’s weight and are three of the fund’s four largest sector weights. Technology is the other. FDL’s overall cyclical exposure is lower than rival dividend ETFs that are not heavily allocated to telecom and utilities stocks.
No sector is as negatively correlated to rising interest rates as utilities, meaning the longer the Fed resists raising interest rates, the longer high-yielding utilities stocks and ETFs remain compelling destinations for yield-starved investors.
Most investors view utilities as a reliable, income-generating asset that exhibit some bond-like characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields.
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