I think that stocks are particularly vulnerable over the next month or so; I have a feeling we’re going to be getting a lot of bad news that isn’t already priced in, explains David Dierking, editor of The Street's ETF Focus.
I think it’s wise for investors to consider defensive positions here instead of trying to hit home runs. Just as much, if not more, outperformance can be achieved in down markets as up markets and dividend ETFs make a solid choice for trying to achieve that.
Dividend ETFs have performed quite well on a relative basis this year, especially dividend growth funds, with a handful even posting positive returns during the 1st half of the year. It’s not guarantee, of course, that they’ll continue outperforming in the 2nd half, but I like how many of them are currently positioned given the economic backdrop continues to deteriorate.
I want to discuss three dividend ETFs that I think are particularly attractive right now. All utilize a multi-tiered approach to stock selection to help identify those stocks that have a better than average chance of leading the market.
On top of that, they all offer 3-4% yields and providing an important steady income component that many corners of the market still fail to offer (without taking excessive risk). Consider adding these ETFs for a bit of safety and yield:
I’m a big fan of Schwab U.S. Dividend Equity ETF (SCHD). Instead of targeting any specific strategy, it targets stocks that have positive characteristics on multiple fronts.
It starts by only considering stocks with a minimum 10-year history of paying dividends and then selecting those with attractive fundamental factors, such as high cash flow to total debt, high return on equity, dividend yield and 5-year dividend growth rate. It finishes by pulling the highest-yielding stocks out of this group and weighting them by market cap.
Investors get all this for a rock bottom expense ratio of just 0.06%. This ETF has performed in the top 40% of Morningstar’s Large Value category in each of the past 9 calendar years and is on pace to do so again in 2022.
Its yield of 3.5% is twice that of the S&P 500 and has delivered these results with modestly less risk than the broader market. If I could own only one dividend ETF, SCHD would probably be it.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) hits a couple of themes that have performed particularly well in the past year — high yielders and low volatility.
The fund’s index starts with the S&P 500 and identifies the 75 stocks with the highest dividend yields over the past 12 months. Within that group, the fund pulls out the 50 stocks with the lowest realized volatility. Qualifying components are then weighted by dividend yield, which helps SPHD offer investors a juicy 4% yield.
If there’s a drawback to this fund, it’s that results are usually feast or famine. In 7 of the past 9 years, SPHD’s performance has landed in either the top 5% or the bottom 11% of its Morningstar peer group. When it’s style is in favor, it’s a top-tier performer. When it’s not, underperformance can be severe.
The good news is that 2022 has been one of the year’s it’s been in favor. It’s currently in the top 3% of its group, outperforming the average by roughly 9% year-to-date. With the economy continuing to slow and global conditions getting worse, it’s reasonable to assume that this fund’s style will remain in favor for a while longer.
Dividend growth stocks aren’t necessarily known for their yields. Some companies have been raising their dividend for decades, but their yields still hover in the 1-2% range. Invesco High Yield Equity Dividend Achievers ETF (PEY) attempts to rectify that problem by pulling out the highest yielders within the long-term dividend grower universe.
PEY’s index initially includes stocks with a minimum 10-year history of consecutive dividend growth. From that group, it targets the 50 highest yielders and weights them by dividend yield.
It doesn’t use the more strict 25-year history requirement to become a dividend aristocrat, but it’s looser requirement allows some of the more recent dividend growers to also make the cut. Overall, it’s a nice balance between dividend growth and high yield. It also yields 4% right now.