Get Paid To Play Defense With This Dividend ETF

Thanks to dozens of cuts courtesy of the energy sector, dividends are off to a rough start in 2016. However, low volatility stocks and exchange-traded funds continue to be favored hideouts. Those scenarios would appear to mean a dichotomy for the PowerShares S&P 500 High Dividend Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE:SPHD)).

To its credit, SPHD is down about 2.6 percent year-to-date, a performance that is far superior to the 9.4 percent drop incurred by the S&P 500. What appeared to be a burden for SPHD heading into 2016 is turning into a blessing. That being the ETF's more than 39 percent combined weight to financial services and utilities stocks. Yes, financials are slumping but SPHD features significant exposure to rate-sensitive real estate stocks.

A Closer Look At SPHD

SPHD is covered in case rates rise with over 33 percent combined exposure to cyclical financial services and industrial stocks. Importantly, SPHD did its job when investors really needed it to do just that.

SPHD's underlying index, the S&P 500 Low Volatility High Dividend Index, combines two defensive factors. The index seeks to include the 50 least-volatile, high-dividend-yielding securities in the S&P 500 and is rebalanced on a semiannual basis. The methodology for the S&P 500 Low Volatility High Dividend Index recognizes companies for their yield, but not the longevity of payments, according to S&P Capital IQ.

Not surprisingly, SPHD's smallest sector weight is an almost 3 percent allocation to energy stocks. The ETF's top 10 holdings include telecom giants AT&T Inc. (NYSE:T) and Dow component Verizon Communications Inc. (NYSE:VZ).

SPHD, which has a trailing 12-month dividend yield of almost 3.5 percent, pays a monthly dividend. That is an important trait for older investors looking for a steady income stream and for young investors looking to more fully exploit the advantages of compounding.

The S&P 500 is a well-diversified US equity index, seeking to provide exposure to companies with various characteristics. While some of these factors, such as growth or high beta, can be viewed as cyclical and may tend to lead an index constituent to perform well in a risk-on environment, others, such as low volatility or dividends, may be more defensive and potentially lead constituents to perform better in a 'risk-off' market. Some of these defensively oriented indices have demonstrated higher performance in the start the year, added S&P Capital IQ.

Disclosure: Todd Shriber owns shares of SPHD.

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