Dividend stocks can be less volatile than their non-dividend counterparts. Some exchange traded funds ratchet up that concept by focusing on dividend stocks with favorable volatility characteristics. That group includes the Invesco S&P 500 High Dividend Portfolio (NYSEArca: SPHD).
SPHD “is composed of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility,” according to Invesco.
“The fund prioritizes dividend yield over low volatility. It starts with the 75 highest-yielding stocks in the S&P 500,” said Morningstar in a note out Friday. “To limit risk, the fund ranks all stocks that pass its initial screen on their volatility over the past year and removes the most volatile 25. Volatility isn’t a perfect measure of risk, but less-volatile stocks tend to have more-stable cash flows than their more-volatile counterparts and generally hold up better during market downturns.”
SPHD is not a dedicated dividend growth ETF but many of its holdings have lengthy track records of consistent payout growth and that is a good thing for investors. 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.
More SPHD ETF Details
SPHD has a 12-month distribution rate of just over 4%, well above the comparable metric on the S&P 500. Not surprisingly, the fund is heavily allocated to sectors with reputations for being high dividend destinations. The utilities, real estate and consumer staples sectors combine for over half of SPHD’s roster. Given the interest rate sensitivity in some of those sectors, SPHD’s volatility traits are more inline with the broader market than some investors may expect.
“Despite its volatility screen, the fund has exhibited comparable volatility to the S&P 500. That’s because its focus on dividend yield pulls it toward some of the riskier names in the index to begin with, which its volatility screen helps offset,” according to Morningstar.
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While SPHD is positioned as a low volatility fund, it has a noticeable value bias as two-thirds of its holdings are classified as value stocks.
“Mature, slow-growing firms tend to trade at lower valuations and pay out a larger share of their earnings as dividends than their faster-growing counterparts, which are investing more aggressively to expand. Both characteristics can lead to higher dividend yields,” said Morningstar.
The research firm has a Bronze rating on SPHD.
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