Despite the shifting interest rate outlook, the ongoing low-rate environment has still compelled many income-minded investors to diversify and look for alternatives, like dividend-related exchange traded funds, in an attempt to generate attractive yields.
For example, the Oppenheimer Ultra Dividend Revenue ETF (NYSEArca: RDIV), which tracks 60 stocks in the S&P 900 with the highest 12 month trailing dividend yield and weights them by revenue, shows a 3.42% 12-month dividend yield.
While some may be put off by the focus on highest yielding dividend stocks taken from a broader universe and the potential risks this entails, RDIV also includes a revenue-weighted tilt that could refocus the ETF strategy toward companies with stronger fundamentals or those that are more likely to maintain their higher level of yields.
Revenue weighting could provide diversified exposure to the market, is not influenced by stock price, reflects a truer indication of a company’s value and offers stable sector exposure. Moreover, revenue weighting may provide a more value-oriented portfolio and historically outperformed in a value-driven market while showing lower drawdowns during growth-driven markets.
“We think it is incredibly important to look beyond market capitalization and focus on fundamental metrics such as revenue when building an efficient portfolio,” according to an OppenheimerFunds research note. “Our revenue-weighting methodology can help investors look through the noise of short-term price movements and focus on the long-term fundamentals that matter. Because of this, we continue to believe that the Fund will provide an opportunity to outperform over the long term while offering excellent dividend yield.”
By rebalancing toward companies with persistent sales, revenue weighting helps keep a portfolio from overstaying during an overheating market. The result could be a portfolio with better risk-adjusted returns over the long haul.
“Revenue weighting is based on a reliable, tangible indicator of a company’s success,” according to OppenheimerFunds.
RDIV is heavy on dividend-paying consumer discretionary names at 30.3% of the portfolio, followed by utilities 21.9%, telecom services 15.4%, energy 13.1% and real estate 10.7%. Top holdings include Duke Energy 5.6%, Target Corp. 5.4%, Verizon Communications 4.9%, Southern Co. 4.8% and AT&T 4.8%.
For more on Smart Beta ETFs, visit the Smart Beta Channel home page.