The universe of what’s working this year in terms of equities is sparsely populated, but among the obvious standouts are value strategies.
Add high dividends to the mix, and the picture considerably brightens. Take the case of the WisdomTree U.S. High Dividend Fund (NYSEArca: DHS). DHS, which follows the WisdomTree U.S. High Dividend Index, entered May 23 with a year-to-date gain of 5.2% — a remarkable showing, particularly when measured against the S&P 500’s 18% decline.
This year, DHS is proving to be a case study in the importance of the intersection of dividends and value. On a standalone basis, value, broadly speaking, is floundering this year. It’s simply outperforming the broader market, which isn’t saying much. However, high dividend is the one factor strategy that is working, and it just so happens that many high dividend equities are either defensive or value stocks.
“With value beating growth by over 17% year-to-date,3 dividend-oriented indexes, which tend to have high overlap with traditional value indexes, have fared even better. High dividend equities are up over 4% and quality dividend growth stocks have outperformed the S&P 500 by 10.59%,” wrote WisdomTree analyst Matt Wagner. “According to Bank of America Quant Research, the high dividend yield factor was the best-performing factor year-to-date through April of all approximately 50 equity factors it tracks.”
As Wagner pointed out, DHS’s stellar showing this year is a reversal from 2020, when low yield sectors, such as communication services and technology, led the market’s rebound from the coronavirus slump. That and consumer discretionary are considered the epitomes of low yield sectors, but those three groups combine for just about 8% of the DHS roster.
Additionally, the $1.1 billion ETF has some traits that make it right for this environment — a claim that some ETFs can make, but one DHS is clearly making good on.
“As the Fed aggressively hikes short-term rates it stands to reason investors will prefer the current cash flows of dividends over the uncertainty of non-dividend-paying growth stocks,” concluded Wagner. “Dividend growth has historically outpaced inflation. Because stocks are real assets with profits that increase with inflation, dividend payouts also grow with inflation—unlike bond coupons.”
With the Federal Reserve’s back against the wall due to its tardiness in fighting inflation, many market observers believe it has no choice but to continue raising rates, likely punishing bonds in the process. That could make DHS and its 3.65% dividend yield all the more appealing for the remainder of 2022 and perhaps beyond.
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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.