+ 2.48
+ 0.75%
+ 3.20
+ 0.93%
+ 3.31
+ 0.8%
+ 0.23
+ 0.16%
+ 2.73
+ 1.63%

How This High Dividend ETF Adds Another Layer Of Protection

January 9, 2020 10:44 am
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How This High Dividend ETF Adds Another Layer Of Protection

The dividend yield on the S&P 500 is just 1.74%. Ten-year Treasuries are barely more impressive at 1.87%, so it's no wonder that plenty of investors will revisit high dividend stocks and exchange traded funds this year.

There are dozens of high-yield dividend ETFs on the market and while many simply weight securities by yield and go from there, the WisdomTree U.S. High Dividend Fund (NYSE:DHS) adds more protection to the high dividend scenario.

Some added protection with high dividend strategies is an often overlooked benefit because stocks gain high yields for a simple reason: falling share prices. Additionally, many of the companies in the high-yield camp are financially strained and may be apt to reduce or suspend dividends.

Why It's Important

The WisdomTree U.S. High Dividend Index, DHS's underlying benchmark, weights components by yield, but the value, quality and momentum factors are part of the equation, too.

“The value factor is designed to lower weight to companies deemed expensive by other traditional measures of valuation,” WisdomTree said in a recent note. “The quality factor is designed to lower weight to companies with poor profitability metrics or declining measures of profitability. The momentum factor is designed to lower weight to companies that have a high yield but only because their stock prices are declining.”

DHS yields 3.5%, but it's not overly dependent on traditional high-yield sectors as real estate and utilities combine for just 24% of the fund's weight. Conversely, health care and technology, steady dividend growth groups, combine for over 26%.

Although it's a high-yield fund, many of DHS's 318 components have lengthy dividend increase streaks, some of which are measured in decades.

What's Next

WisdomTree uses the value, quality and momentum factors to render a composite score that filters out bad apples, providing an extra layer of protection for investors. In fact, nearly 100 companies were excluded from DHS during the most recent evaluation period.

“While the excluded companies had substantially higher dividend yields, other metrics were much less favorable,” said WisdomTree. “The aggregate trailing P/E ratio for these excluded companies was 30x earnings, driven by the fact that more than one-quarter of the basket has negative trailing earnings. Looking at a standard quality metric like return on equity, we also saw substantially lower values. These companies also were net share issuers, diluting existing shareholders by issuing 3% of new shares outstanding.”

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