A Practical Idea for Accessing Big Dividends

Dozens of exchange traded funds offer exposure to high dividend equities. One of the most venerable is the iShares Select Dividend ETF (DVY).

DVY seeks to track the investment results of the Dow Jones U.S. Select Dividend Index and is composed of relatively high dividend paying U.S. equities. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index.

While it yields around 3.35%, part of DVY’s near-term allure is its exposure to value stocks. Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures.

DVY 1 Year Total Return

Digging Into ‘DVY’

Value hasn’t been in favor for several years, which has led to this start of rotation. A major inflection point began with the presidential election last November, which strengthened with positive vaccine news.

Adding to the case for DVY is that there’s an element of dividend growth in the fund; the ETF requires components to have paid dividends for at least five straight years. That strategy keeps investors away from payout offenders.

Investors should keep in mind that one of the best long-term inflation hedges is exposure to the equities market, which typically rises along with the broader growth in the economy. Additionally, income-oriented equities that have historically managed to increase their dividend yield to shareholders at a rate above the pace of inflation are more attractive since they produce regular income, unlike hard asset inflation hedges like gold, which don’t come with any yields.

Steady dividend payouts have also helped produce improved risked-adjusted returns over time. The highest-quality companies have proven their ability to grow their dividends over time, surviving through a range of market environments, and even raising dividends after previous recessions.

Adding to the allure of high dividend strategies such as DVY, is that many companies are growing more confident in their ability to service and grow dividends heading into mid- or late-2021. According to FactSet estimates, S&P 500 per-share earnings are expected to bounce 22% in 2021—to above 2019 levels.

For more on income strategies, visit our Retirement Income Channel.

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.