Dividend Strategies To Consider In 2016
Reflecting back on 2015, it is accurate to say it was another good year for investors in terms of shareholder rewards, as buybacks continued soaring and S&P 500 dividends kept growing at an impressive clip.
However, against the backdrop of rising interest rates, the impact higher borrowing costs have on some high-yield sectors and rampant dividend cutting in the energy sector, 2015 was not the most sanguine year for dividend exchange-traded funds.
“It was a strange year for dividend-focused investors in 2015. Expectations of when the Federal Reserve would end its highly accommodative monetary policy, coupled with some sector specific issues, caused many high-dividend-yielding pockets of the market to decline. Yet, according to data from S&P Dow Jones Indices, it was the fourth consecutive year of annual record cash payments by S&P 500 companies as dividends rose 10 percent in 2015. Further, some high-yielding companies were acquired. Not surprisingly, the performance of U.S. dividend ETFs varied depending on their holdings,” said S&P Capital IQ in a recent research piece.
Dividend ETF In The Spotlight
As the research firm noted, the PowerShares S&P 500 High Dividend Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE: SPHD)) is a prime example of a dividend ETF that excelled last year. SPHD, which holds the 50 S&P 500 members with highest yields and lowest trailing 12-month volatility, rose 5.2 percent last year.
That performance is arguably surprising when considering SPHD's exposure to rate sensitive sectors. SPHD allocates over 44 percent of its combined weight to utilities and financial services stocks; the latter group being potentially problematic to this particular ETF because many of SPHD's financial services holdings are rate-sensitive real estate stocks.
Familiar names found among SPHD's top 10 holdings include:
- AT&T Inc. (NYSE: T)
- Baxter International Inc (NYSE: BAX)
- Philip Morris International Inc. (NYSE: PM)
Others Did Not Perform As Well
The Guggenheim Multi-Asset Income Index ETF (Claymore/Zacks Multi-Asset Inc Idx (ETF) (NYSE: CVY)) was not so fortunate in 2015, slumping more than 14 percent.
“Relative to the S&P 500 index, CVY had greater exposure to oil, gas & consumable fuel companies (17 percent of assets) and REITs (9.6 percent) that were hit hard. In addition, CVY has exposure to stocks in other industries that had company-specific challenges such as Viacom (VIAB 41). The ETF is relatively diversified at the security level, with approximately 150 positions; top-10 holdings comprised 12 percent of assets,” said S&P Capital IQ.
The $497.5 million CVY and other mutli-asset ETFs were popular with investors during the go-go days of the Fed's quantitative easing regime, but some market observers view these funds as vulnerable to rising rates due to asset mixes that include high-yield bonds, real estate and master limited partnerships.
“S&P Capital IQ has rankings on approximately 850 equity ETFs. Among U.S. dividend-focused ETFs, 11 had positive returns while 32 were negative in 2015. But the losses incurred by the worst performers far exceeded the gains of the top performers,” added the research firm.
Disclosure: Todd Shriber owns shares of SPHD.
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