The iShares Core High Dividend ETF (NYSEArca: HDV) gained just over 13% last year. While that performance lagged the broader market, HDV remains a solid bet for dividend investors in 2018.
HDV follows the Morningstar Dividend Yield Focus Index and the ETF’s other double-digit sector allocations are healthcare and utilities. In 2014, HDV became a member of the iShares core suite of ETFs and its addition to the iShares core suite came a dramatic fee reduction that took the ETF’s annual expense ratio to 0.12% from 0.4%.
The $6.6 billion HDV holds 74 stocks and has a trailing 12-month dividend yield of almost 3.2%. HDV is also a fine idea for investors looking to avoid volatile sectors and stocks as the ETF’s three-year standard deviation is just 8.8%.
Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
While a rise in rates would diminish the attractiveness of dividend stocks with premium valuations and low growth, more high quality dividend payers or the group of dividend growers may stand out. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. With interest rates rising, high-yield dividend stocks could lag while dividend payers with lower yields and quality traits could outperform.
“Of course, high yield funds could come under pressure this year if the Fed decides to hike rates faster than expected. The current forecast coming out of the Federal Reserve is that we will see three rate hikes in 2018. If these increases do occur, it will pressure dividend funds because the yield offered on risk-free assets will increase, making the yield offered by funds such as HDV less attractive,” according to a Seeking Alpha analysis of HDV.
HDV allocates over 36% of its combined weight to the rate-sensitive consumer staples and telecom sectors, but that is balanced somewhat by a combined 31.5% to the cyclical energy and technology sectors. The energy and technology sectors typically perform well as interest rates rise.
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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.