With 2021 beckoning, so are improving dividend expectations, but investors can dial back risk and reduce the potential for disappointment with the Hedged Dividend Income ETF (NYSEArca: DIVA).

DIVA is an ETF that can help reduce some of the equity risk that comes with dividend investing. DIVA tracks the INDXX Hedged Dividend Income Index, which is designed to deliver a strong current yield capital appreciation potential with a risk profile similar to a corporate bond index, according to the issuer, AGFiQ.

DIVA holds 100 equally weighted securities within the universe of the largest 1,000 US stocks that have paid consistent or growing dividends, and which have the highest dividend yields. The fund shorts approximately 150 to 200 stocks within the same universe that have the lowest-to-no dividend history and low yields. Due to its indexing methodology, investors may find higher yields than dividend stocks while potentially hedging against volatility of equity markets.

DIVA YTD Performance

Exploring the DIVA ETF

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.

The fund 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.

Dividends are in demand as fixed-income investors face a lower-for-longer interest rate environment. The Federal Reserve is expected to maintain its near-zero interest rate policy to help push inflation up, bolster the economy, and lower the unemployment rate. The Fed has already stated it is willing to let inflation run higher to offset years in which inflation fell below its 2% target.

Companies are increasingly confident in growing dividends again, even as another surge in Covid-19 cases threatens earnings. According to FactSet estimates, S&P 500 per-share earnings are expected to bounce 22% in 2021—to above 2019 levels.

As a result, companies are feeling better about returning more of their capital to shareholders. S&P 500 dividends are expected to grow 3% in 2021 from 2020, according to FactSet. The payout ratio—the percent of earnings companies use to pay dividends — is expected to fall to about 35% from 42%, but the pure growth in dividend dollars still provides an attractive yield opportunity at current prices.

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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.