Stocks with high dividend yields are almost always tempting, but that's even more so in today's climate of paltry bond yields, barely noticeable returns on cash and historically low interest rates.
What To Know: Despite the obvious allure, high-yield equities come with obvious risks, namely the possibility of strained balance sheets that can't support current dividend obligations let alone future payout growth. That much was on display earlier this year when many of the S&P 500 member firms that cut distributions in the first half of 2020 were considered high dividend names at the name of those reductions.
A new exchange-traded fund attempts to bring some level of safety to high-yield equity investing. The KFA Value Line Dynamic Core Equity Index ETF KVLE debuted last week. KVLE, which is a large-cap fund, follows the ValueLine Dynamic Core Equity Index.
Why It's Important: While KVLE offers a unique avenue to equity income, it's not a dedicated dividend ETF as highlighted by the fact that Amazon AMZN, which doesn't pay a dividend, is the new fund's second-largest holding.
“The strategy seeks to capture quality US companies based on a three-factor process that selects stocks with high dividend yields and are the highest rated among Value Line’s safety and timeliness ranking system,” according to KFA Funds.
All of KVLE's other top 10 holdings are dividend payers, including some with enviable track records of payout growth, such as Apple AAPL and Johnson & Johnson JNJ. The new ETF's top 10 components combine for 28.55% of the fund's weight.
KVLE's 76 member firms are stocks unearthed by ValueLine that are among the top 25% in terms of dividend yield with target betas of 0.8 to 1.
What's Next: At its core, KVLE is a focused large-cap strategy with a quality overlay. The quality factor, though fluid in definition relative to other investment factors, is persistent over time, often delivering stout risk-adjusted returns across all market capitalization spectrums.
Quality hallmarks include companies with strong return on equity (ROE), return on assets, sturdy balance sheets and management teams committed to dividends and/or share repurchase plans.
KVLE, the sixth ETF in the KFA funds stable, charges 0.56% per year, or $56 on a $10,000 investment.
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