It has been widely noted throughout the course of this year that dividend exchange-traded funds, particularly those of the high-yield variety, have struggled in large part due to intensified speculation that the Federal Reserve will finally raise interest rates. The justification behind the moves relates to the trend that those funds usually feature large allocations to rate-sensitive sectors such as consumer staples, real estate and utilities.
With a trailing 12-month dividend yield of 7.7 percent, it is not surprising to learn that the Global X SuperDividend U.S. ETF (NYSE:DIV) has tumbled 12.6 percent this year. Those are the breaks for an ETF that, at the end of the third quarter, allocated a combined 68.4 percent of its weight to mortgage real estate investment trusts (REITs), the utilities sector and master limited partnerships (MLPs).
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The index DIV follows is the SuperDividend U.S. Low Volatility Index. DIV tracks the performance of 50 companies that rank among the highest dividend yielding equity securities in the United States, according to Global X.
Indeed, the aforementioned asset classes are vulnerable to higher interest rates. At least that is what many investors believe, but income investors should not be hasty in dismissing DIV even if rates do rise.
Past Performances Of High-Dividend Stocks
Recent research by Global X indicates that in seven of the 10 Fed tightening cycles since 1960, high-dividend stocks have actually outperformed the S&P 500.
In the three tightening cycles in which high-dividend stocks lagged the broader market, those were the cycles when the Fed was tightening the fastest. Expectations are that if more interest rate hikes arrive next year, the pace will be gradual.
US interest rates are expected to increase in the near future, but given slow global growth and low inflation, many economists expect rate increases to be gradual. Environments with slow interest rate increases have historically led to continued outperformance of high dividend stocks, said Global X in a recent presentation.
A Closer Look AT DIV
DIV's top 10 holdings include Reynolds American, Inc. (NYSE:RAI), Philip Morris International Inc. (NYSE:PM) and Altria Group Inc (NYSE:MO), an advantage at a time when tobacco stocks are among the best performers in the consumer staples sector.
Despite the defensive posture of many of its holdings and its high-yield positioning, DIV is not richly valued. Actually, the ETF trades at a discount to the broader market, with a price-to-earnings ratio of 12.9. That is low compared to other high dividend ETFs and well below the P/E of the S&P 500. Plus, DIV pays a monthly dividend.
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