Broadly speaking, dividend stocks and the related exchange traded funds are among the most durable shelter-from-the-storm plays.
The Franklin U.S. Low Volatility High Dividend Index ETF (NASDAQ: LVHD) is one of the standouts of the group. Owing to its combination of high dividends and low volatility, LVHD is at the right place at the right time this year, and as such, the ETF is easily outpacing the broader market.
While LVHD is a high dividend ETF, as its name implies, it’s still levered to rising payouts, which data confirm are, in fact accruing in significant fashion. That’s a tailwind for the fund and one that could cement its status as a valid inflation-fighting tool.
“US dividends increased 8.3% on an underlying basis in the second quarter to $144.4 billion, an all-time quarterly high, according to the latest Janus Henderson Global Dividend Index. Two-fifths of the increase can be traced to the financial sector. Notably, Morgan Stanley and Wells Fargo made the largest contributions to growth in US dividends, collectively contributing an extra $1.1 billion,” according to the latest reading of the Janus Henderson Global Dividend Index.
There are other points of allure with LVHD. Notably, the ETF is outperforming at a time of rising interest rates – something that doesn’t always happen with high dividend stocks and ETFs. Additionally, a case can be made that the low volatility/high payout combination could be a more fruitful bet than U.S. government bonds.
“Despite a turbulent 2020, many equity funds were able to continue offering consistent and growing income payments. Investors would do well to consider such options as an income source, especially in a low-rate environment. Morningstar Yield suggests they may be superior income opportunities over a given period compared with Treasuries maturing after a comparable period, even over a volatile period such as the coronavirus drawdown,” notes Morningstar analyst Nicholas Goralka.
While it should be implied due to its status as a low-volatility fund, LVHD could also prove less volatile than active mutual funds aiming for comparable investment objectives. Data confirm equity income ETFs can be less volatile than their actively managed counterparts.
“An income volatility adjustment can be applied to the rolling 12-month income streams to penalize managed investments, which force investors to endure sudden, sharp drops in income. ETFs typically have lower income volatility than open-end funds,” adds Goralka.
For more news, information, and strategy, visit the Volatility Resource 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.
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