These are go-go days for investors looking for above-average equity income with the benefits of lower volatility. A slew of ETFs offers exposure to that combination. The VictoryShares US Large Cap High Div Volatility Wtd ETF (NasdaqGM: CDL), which hit an all-time higher earlier this week, is part of that conversation.
CDL tracks the highest 100 dividend-yielding stocks of the CEMP U.S. Large Cap 500 Volatility Weighted Index with four quarters of positive earnings and is weighted based on their daily standard deviation, or volatility.
CDL has some surprises, including no exposure to real estate stocks and a dividend yield of 2.91%, which implies room for dividend growth, not yield so high that investors have to be concerned about negative dividend action in the fund’s underlying components.
“Typically, ETFs that make a commitment to high dividends and low volatility feature large weights to the real estate and utilities sectors. CDL only honors half of that tradition as the fund has a roughly 20% weight to utilities stocks and no real estate exposure,” according to Nasdaq.
Dividend Growth, Too
While CDL is positioned as low volatility/high yield strategy, plenty of its components offer dividend growth potential, an important quality trait for long-term investors.
“Not all dividend strategies are alike. Some prioritize dividend growth, while others prioritize current income,” said Morningstar in a recent note. “Those that aggressively chase yield are often riskier than their growth-oriented counterparts, as many of their holdings offer high yields because of falling share prices often resulting from deteriorating fundamentals.”
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
Companies with a record of raising dividends are more attractive than usual since they issue their dividends cautiously. These dividend payers typically include higher quality companies that are more cautious when raising dividends since they would do so without stretching their balance sheets.
“CDL is classified as a large-cap value and the fund lives up to that billing with a price-to-earnings ratio of 14.16x, which is below the comparable metric on the Russell 1000 Value Index,” according to Nasdaq.
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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.