In what’s rapidly becoming a rough climate for dividends high yield with a hedge by way of the Hedged Dividend Income ETF (NYSEArca: DIVA) could be a strategy to consider.
DIVA tracks the INDXX Hedged Dividend Income Index, which is designed to deliver to investors a strong current yield capital appreciation potential with a risk profile similar to a corporate bond index, according to AGFIQ. The fund yields almost 3.60%.
DIVA also employs a long/short strategy to take advantage of some of the volatility associated with low or volatile dividends. The fund “provides 100% long exposure to stocks with stable or growing dividends that trade at high yields and 50% short exposure to stocks with unstable or low dividends,” according to the issuer.
DIVA could be useful at a time of growing anxiety in the dividend space.
“March 2020 announcements turned negative, as 13 issues announced cuts, with 10 of them being suspensions, making for a total forward impact of USD 13.9 billion, and more cuts are expected,” according to S&P Dow Jones Indices. “For U.S. common issues, the net-indicated dividend change was USD -5.5 billion, with the last negative in Q2 2009 (USD -4.9 billion) and the previous record low in Q2 2009 (USD -43.8 billion).”
DIVA Power
What makes DIVA relevant in the current environment is its ability to source payout stability. DIVA looks for stable or growing dividends and looks for the highest yield among the 1,000 largest names in the U.S. The portfolio then limits sector weights and equally weights components to avoid concentration risks. Furthermore, the ETF shorts stocks with low yields to hedge equity and sector risks as a way to diminish overall portfolio volatility and preserve the dividend yield of long securities.
DIVA also employs a long/short strategy to take advantage of some of the volatility associated with low or volatile dividends. The fund “provides 100% long exposure to stocks with stable or growing dividends that trade at high yields and 50% short exposure to stocks with unstable or low dividends,” according to the issuer.
Investors have been foraging for yield the last couple of months as Treasury yields have fallen to record lows and inverted yield curves are emanating recession signals from the bond markets. However, there is still yield to be had when it comes to looking at certain corners of the market, like exchange-traded products (ETPs). For its part, DIVA yields 5.11%.
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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.
