Broadly speaking, investors don’t like taking on excessive risk to grab dividend payouts. But many ‘best of both worlds’ approaches are out there, including the VictoryShares US Large Cap High Div Volatility Wtd ETF (NasdaqGM: CDL).
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 weighted based on their daily standard deviation, or volatility.
The VictoryShares volatility weighted approach should not be confused with low-volatility strategies, which are designed to capture excess returns to stocks with lower-than-average volatility, beta, and/or idiosyncratic risk.
CDL sports a tempting dividend yield of 3.88%, well above what investors earn on the S&P 500, 10-year Treasuries, or competing low volatility exchange traded funds.
Why the CDL ETF Is A Smart Choice Now
While low-volatility ETFs may only hold companies that tend to exhibit smaller swings using the factor as a selection, the VictoryShares suite starts with the broad market and screens for companies with four quarters of positive earnings. Those stocks are then weighted based on their standard deviation over the past 180 trading days. Stocks with lower volatility are given higher weightings and stocks with greater volatility are given lower weightings. Ultimately, all securities that pass the earnings criteria are present, just at different weights.
Importantly, CDL does offer credible avenues to dividend growth, a theme that’s expected to be reborn next year following some pain in the first half of 2020.
Markets are mispricing the probabilities of rising payouts, making a dividend growth strategy like CDL even more relevant heading into the new year.
Dividends are in demand as fixed-income investors face a lower-for-longer interest rate environment. The Federal Reserve is expected to maintain its near-zero interest rate policy to help push inflation up, bolster the economy, and lower the unemployment rate. The Fed has already stated it is willing to let inflation run higher to offset years inflation fell below its 2% target.
Companies are increasingly confident in growing dividends again, even as another surge in Covid-19 cases threatens earnings. According to FactSet estimates, S&P 500 per-share earnings are expected to bounce 22% in 2021—to above 2019 levels.
As a result, companies are feeling better about returning more of their capital to shareholders. S&P 500 dividends are expected to grow 3% in 2021 from 2020, according to FactSet. The payout ratio—the percent of earnings companies use to pay dividends — is expected to fall to about 35% from 42%, but the pure growth in dividend dollars still provides an attractive yield opportunity at current prices.
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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.