PM Images
The past year was not good for equities. The same can of course be said of most equity factors. There is however one exception: the high dividend factor. It’s the only equity factor with a positive total return over the past 12 months. Dividends always play an important role in the total returns of investment portfolios. This is even more the case when the price appreciation of equities is low, as was the case in 2022. This might also be the case in 2023. Equities are still in a long term downtrend. This strengthens the case for high dividend equities even more. Our favourite high dividend ETF is the iShares Core High Dividend ETF (NYSEARCA:HDV). Buy!
Factor performance
While most factor ETFs outperform the S&P, there is only one with a positive total return over the past 12 months: high div!
Figure 1: Total return chart (Yahoo! Finance, Author)
One factor underperformed the S&P 500: growth. Those “long duration” equities were heavily hit by the rising interest rates. High dividend stocks sit on the other end of the duration spectrum and are hence less impacted by the higher rates. Companies that are able to consistently pay out dividends are also considered more mature, with stronger cash flows. And this helps when stock markets decline.
There is also only one equity factor that’s in a clear long term uptrend: high div!
Figure 2: Trends (Yahoo! Finance, Author)
When to buy high div ETFs?
A chart comparing the price return of an equity index with the total return (including reinvested dividends) of that same index shows that it’s actually always a good idea to buy high dividend stocks.
Figure 3: Price return vs total return (Charles Schwab)
And it is even more the case when the outlook for stocks is meagre. Stocks (and REITs) are still in a downtrend.
Figure 4: Trends (Yahoo! Finance, Author)
So, while it’s always a good idea to buy high dividend stocks, it is certainly the case now!
Let’s take a look at the different high div ETFs on the market.
High div ETFs
It will not surprise you that all the high div ETFs outperformed the S&P 500 over the last 12 months.
Figure 5: Total return chart (Yahoo! Finance, Author)
Only two ETFs posted a positive total return: the iShares Core High Dividend ETF and the iShares Select Dividend ETF (DVY).
HDV and DVY are also the only two high div ETFs in a clear long term uptrend.
Figure 6: Trends (Yahoo! Finance, Author)
Which of both ETFs is preferable over the other?
The iShares Core High Dividend ETF
Both HDV and DVY seek “to track the investment results of an index composed of relatively high dividend paying U.S. equities”.
HDV tracks the Morningstar Dividend Yield Focus Index that screens stocks based on their economic moat, which is a measure of a firm’s ability to maintain its competitive advantage over other firms in its industry. In other words: mature, stable quality companies.
DVY on the other hand tracks the Dow Jones U.S. Select Dividend Index. This index screens out stocks that have a negative historical five year dividend-per-share growth rate or have not paid dividends in each of the previous five years.
The different high div approach leads of course to a different portfolio composition.
HDV’s biggest sector weights are Energy and Healthcare.
Figure 7: Sector weights (iShares)
Those two sectors are the only ones that are in a clear long term uptrend.
Figure 8: Trends (Yahoo! Finance, Author)
DVY has a much lower weight in both sectors.
Figure 9: ETF comparison (ETF Research Center)
HDV invests in technology stocks like Broadcom (AVGO), Cisco (CSCO) and IBM (IBM) and not the FAANGs.
Figure 10: HDV top holdings (iShares)
Another reason to prefer HDV above DVY is the expense ratio. HDV has an expense ratio of only 0.08%, compared to 0.38% for DVY. This lower expense ratio will also have contributed to HDV’s better past performance.
HDV has a 30 Day SEC yield of 4%, a P/E of 15.5 and a P/B of 2.9. On all these measures it’s cheaper than the S&P 500.
Figure 11: Fund characteristics (iShares)
The low beta is another proof of the defensive qualities that high div ETFs like HDV exhibit.
Figure 12 gives an overview of the evolution of both HDV’s short and long term trend over the past years.
Figure 12: Total return chart (Yahoo! Finance, Author)
Conclusion
High dividend is the best performing equity factor. While it is always a good idea to invest in high dividend paying equities, this is even more the case in periods with low equity returns.
Our favourite high div ETF is the iShares Core High Dividend ETF. It has the best past performance and a very low expense ratio. HDV is in a long term uptrend and we like the portfolio composition.
All the lights are green: buy HDV!
Be the first to comment