It’s often said that high-yield stocks are vulnerable to rising interest rates, but in 2022, that thinking could prove antiquated.
Investors looking to rethink high-dividend strategies against the backdrop of rising interest rates might want to consider the WisdomTree U.S. High Dividend Fund (NYSEArca: DHS). Home to nearly $860 million in assets under management, DHS is 15 and a half years old, so it has been tested by previous Fed tightening regimes. The DHS methodology could prove useful again as borrowing costs climb in 2022.
“On December 14, the WisdomTree U.S. High Dividend Index executed its annual rebalance. It had a modest impact on the characteristics of the Index,” notes WisdomTree analyst Matt Wagner. “The Index has a dividend yield greater than 4%—well over twice that of the Russell 1000 Value Index. That equates to a duration of 25 versus the duration of 54 for the Russell 1000 Value.”
DHS, which tracks the WisdomTree U.S. High Dividend Index, includes the highest-yielding 30% of companies taken from all dividend-paying U.S. stocks that meet minimum size and liquidity requirements.
To that end, DHS is significantly overweight to traditional high-yield sectors relative to broader benchmarks, including value indexes. For example, the energy, utilities, and real estate sectors combine for nearly 32% of the exchange traded fund’s weight. Real estate and utilities stocks are believed to be vulnerable to rising rates, but that precedent could shift next year. Additionally, the energy overweight found in DHS is now compelling from an income perspective.
“The oil majors Exxon and Chevron were added back to the Index after being removed at last year’s rebalance based on a proprietary screen of dividend riskiness. Combined, these two holdings make up nearly 10% of the 14% addition to the Energy sector,” adds Wagner.
With an eye towards Fed tightening, equity duration actually favors DHS because the fund’s equity duration is shorter than what investors will find on traditional value indexes and certainly more so than what’s found with growth stocks and funds.
“A Fed hiking cycle is likely to favor value as shorter-duration/high yielders become more attractive with increases in short-term rates. Among WisdomTree’s family of domestic dividend Indexes, the WisdomTree U.S. High Dividend Index fits the bill as having the greatest value/income tilt with a yield advantage of nearly 280 basis points (bps) relative to the S&P 500,” concludes Wagner.
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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.
