A popular combination in the world of smart beta exchange traded funds is the marriage of the low volatility factor and dividend stocks. The PowerShares S&P 500 High Dividend Portfolio (NYSEArca: SPHD) is one of the ETFs that really jump-started the low volatility/dividend movement.
This type of strategy has proven to help investors capture growing markets while limiting drawdowns during periods of increased volatility to generate improved risk-adjusted returns over the long haul.
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 PowerShares. While high dividend strategies could come under duress this year due to speculation regarding the Federal Reserve’s plans for interest rates, SPHD has the potential to remain durable.
Said another way, 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.
“SPHD happens to be a safe option for a dividend yield that runs almost no risk of not being paid. However, ETFs will change their holdings and the dividends are not as consistent as holding a portfolio of hand-picked dividend champions,” according to a Seeking Alpha analysis of SPHD.
SPHD currently sports a dividend yield of 3.9%, which is more than double the dividend yield on the S&P 500 and well above what investors will find on 10-year Treasuries. Additionally, SPHD pays its dividend monthly, boosting its allure for investors looking for a steady income stream.
SPHD’s combination of dividends and low volatility could act as an alternative to traditional yield-generation investments, provide a steady stream of income from quality stocks and temper volatility over the long haul.
“When investors are moving toward retirement, many are starting to focus on dividend yields. This fund would be a more logical choice for someone who wanted to get higher yields but didn’t want full market exposure. In regards to retirement, SPHD also is heavily allocated in consumer staples, which makes sense for an investor who is looking to take smaller losses during a recession,” according to Seeking Alpha.
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