With dividends firming up and equities taking off, it may be wise to consider a small hedge with the Hedged Dividend Income ETF (NYSEArca: DIVA), an ETF that can help reduce dividend equity risk.
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 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 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 hedging against the volatility of equity markets.
Dividends in Demand
DIVIA is worth a look over the near-term because payouts are on the mend.
“Indicated dividend net changes (increases less decreases) for U.S. domestic common stocks increased $9.5 billion during Q4 2020, compared to a decline of $2.3 billion in Q3 2020, and a gain of $10.6 billion in Q4 2019,” according to S&P Dow Jones Indices. “For Q4 2020, aggregate increases amounted to $13.9 billion, up 64.2% from the $8.4 billion increase of Q3 2020 and up 15.7%, from Q4 2019’s $12.0 billion. Aggregate dividend cuts decreased 59.8% to $4.3 billion from Q3 2020s $10.8 billion in cuts, and was up 221% from the $1.3 billion in cuts for Q4 2019.”
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 inflation fell below its 2% target.
DIVA is also positioned as a low volatility income generator as its standard deviation is well below that of the S&P 500. Meanwhile, its yield is well in excess of the Bloomberg Barclays Aggregate Bond Index.
The ETF 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, DIVA 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.
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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.