(This is the fifth article in a series about dividend stocks in today’s low interest-rate environment based on interviews with professional investors. Links to the previous articles are below.)
Investors who want to follow a dividend strategy but are worried about a decline in stock prices may be well-served by a low-volatility fund.
“Investors tend to panic when volatility rises,” said Mike LaBella, head of global equity strategy at QS Investors, which manages the Legg Mason Low Volatility High Dividend ETF
“They tend to sell, which is the worst thing to do.”
The Legg Mason Low Volatility High Dividend ETF is appropriate for investors who are relatively conservative, LaBella said.
QS Investors is based in New York and has about $20 billion in assets under management.
The Legg Mason Low Volatility High Dividend ETF quotes a 30-day yield of 3.50%, and its portfolio yield, based on the past 12 months of quarterly dividends, has been 3.69%, according to Morningstar. The ETF pays out all the dividends it receives, and its yield typically ranges between 3.5% and 4%, LaBella said. (Please see funds with similar strategies in the tables, below.)
That is an attractive range when you consider 10-year U.S. Treasury notes
are yielding 1.62% and 30-year Treasury bonds
have a yield of only 2.10%.
The Legg Mason ETF is made up of 79 stocks screened from the Solactive U.S. Broad Market Index. The index includes about 3,000 stocks of U.S. and foreign companies that have primary listings in the U.S. or American depositary receipts (ADRs).
The QS Investors team screens the stocks to arrive at a list of 50 to 100 companies that have been consistently high dividend payers, while making sure the payouts don’t exceed earnings, or, in the case of real-estate investment trusts, cash flow. They look ahead, using consensus estimates, to try to screen out companies facing problems. The portfolio is rebalanced quarterly. Stocks with the highest scores take a 2.5% portfolio allocation, while the ETF limits exposure to a stock sector to 25% and limits the exposure to REITs to 15%.
“Just by looking at the first couple of screens, we might have very profitable companies with high dividends that are facing disruption,” LaBella said during an interview.
LaBella said an example of the results of the screening is General Electric
which “pretty much cut its dividend out of nowhere, if you only looked at their balance sheet and historical earnings profile” in November 2017.
But in the months before the dividend cut, the ETF didn’t increase its holdings as it ordinarily would have when the stock price fell, because of the increased price and earnings volatility indicated by revisions to analysts’ estimates.
The ETF sold its shares of GE following the dividend cut, but LaBella said it saved “a significant amount of capital,” because it had not loaded up before the cut, and because it avoided continuing declines after selling the shares.
A one-year volatility review
The end of this month marks the one-year anniversary of the start of a brutal 19% decline for the S&P 500
that ran through Dec. 24.
There are always concerns over the economy. When will the current expansion end? How aggressive will the Federal Reserve be with its monetary policy? But investors now have structural worries — will Brexit take place? How much will the disruption to the U.K. and eurozone economies, which are already weak, affect the U.S. stock market? How radical will the transformation of world trade relationships be in the event of a yearslong trade dispute between the U.S. and China?
It’s worth pointing out that despite all the headlines about a strong U.S. stock market this year, with the S&P 500 returning 20.5% through Sept. 6 (with dividends reinvested), the benchmark index has returned only 5.8% over the past 12 months.
Here’s a comparison of total returns for the Legg Mason Low Volatility High Dividend ETF and the S&P 500 Index over the past year:
During the S&P 500’s 19% drop (with dividends reinvested) from Sept. 28 through the close on Dec. 24, 2018, the ETF was down only 9%, and its 12-month return has been significantly higher than that of the index.
Here are the 20 largest holdings of the Legg Mason Low Volatility High Dividend ETF as of the close on Sept. 6:
|Company||Ticker||Share of fund||Dividend yield||Total return – 1 year through Sep. 6|
|Crown Castle International Corp||2.8%||3.07%||33%|
|Procter & Gamble Co.||2.8%||2.43%||53%|
|Merck & Co. Inc.||2.7%||2.54%||28%|
|American Electric Power Co. Inc.||2.6%||2.94%||28%|
|Duke Energy Corp.||2.6%||4.03%||17%|
|Verizon Communications Inc.||2.6%||4.17%||13%|
|General Mills Inc.||2.6%||3.57%||22%|
|Xcel Energy Inc.||2.5%||2.50%||35%|
|Public Service Enterprise Group Inc.||2.5%||3.11%||17%|
|United Parcel Service Inc. Class B||2.4%||3.20%||1%|
|Huntington Bancshares Inc.||2.4%||4.43%||-14%|
|Eaton Corp. PLC||2.4%||3.41%||2%|
|Consolidated Edison Inc.||2.4%||3.25%||16%|
|Exxon Mobil Corp.||2.3%||4.91%||-8%|
|WEC Energy Group Inc.||2.3%||2.53%||38%|
Other dividend-stock ETFs designed for low volatility
Here’s a list of low-volatility dividend-stock ETFs, starting with the Legg Mason Low Volatility High Dividend ETF, with the rest sorted alphabetically:
|ETF||Ticker||Total Assets ($mil)||12-month yield||Expense ratio||Dividend payment frequency|
|Legg Mason Low Volatility High Dividend ETF||$744||3.69%||0.27%||Quarterly|
|Invesco S&P 500 High Dividend Low Volatility ETF||$3,369||4.29%||0.30%||Monthly|
|Invesco S&P Intl Developed High Dividend Low Volatility ETF||$11||4.27%||0.30%||Quarterly|
|Invesco S&P SmallCap High Dividend Low Volatility ETF||$24||5.27%||0.30%||Monthly|
|Legg Mason Emerging Markets Low Volatility High Dividend ETF||$6||4.46%||0.51%||Quarterly|
|Legg Mason International Low Volatility High Dividend ETF||$49||4.74%||0.40%||Quarterly|
|O’Shares FTSE U.S. Quality Dividend ETF||$529||2.61%||0.48%||Monthly|
|VictoryShares Emerging Market High Dividend Volatility Weighted ETF||$43||5.97%||0.50%||Monthly|
|VictoryShares International High Dividend Volatility Weighted ETF||$88||5.42%||0.45%||Monthly|
|VictoryShares U.S. Large Cap High Dividend Volatility Weighted ETF||$338||3.08%||0.35%||Monthly|
|VictoryShares U.S. Small Cap High Dividend Volatility Weighted ETF||$88||3.12%||0.35%||Monthly|
|Sources: FactSet, Morningstar|
Dividend yields are net of expenses.
Here’s the same group with additional information:
|ETF||Ticker||Inception date||Morningstar rating||Total return – 12 months||Total return – 3 years||Total return – 5 years|
|Legg Mason Low Volatility High Dividend ETF||12/29/2015||4 stars||9%||28%||N/A|
|Invesco S&P 500 High Dividend Low Volatility ETF||10/18/2012||4 stars||3%||18%||60%|
|Invesco S&P International Developed High Dividend Low Volatility ETF||12/01/2016||N/A||7%||N/A||N/A|
|Invesco S&P SmallCap High Dividend Low Volatility ETF||12/01/2016||N/A||-10%||N/A||N/A|
|Legg Mason Emerging Markets Low Volatility High Dividend ETF||11/17/2016||N/A||-1%||N/A||N/A|
|Legg Mason International Low Volatility High Dividend ETF||07/27/2016||5 Stars||6%||23%||N/A|
|O’Shares FTSE U.S. Quality Dividend ETF||07/14/2015||4 stars||10%||34%||N/A|
|VictoryShares Emerging Market High Dividend Volatility Weighted ETF||10/26/2017||N/A||2%||N/A||N/A|
|VictoryShares International High Dividend Volatility Weighted ETF||08/19/2015||3 Stars||0%||8%||N/A|
|VictoryShares U.S. Large Cap High Dividend Volatility Weighted ETF||07/08/2015||4 stars||3%||32%||N/A|
|VictoryShares U.S. Small Cap High Dividend Volatility Weighted ETF||07/08/2015||5 Stars||-8%||28%||N/A|
|Sources: FactSet, Morningstar|
The only ETF on the list that has been around for at least five years is the Invesco S&P 500 High Dividend Low Volatility ETF
which was established in 2012. Its five-year total return (with dividends reinvested) of 60% compares with a return of 64% for its benchmark index, the S&P 500. SPHD’s monthly price volatility (standard deviation) for five years has been 3.07, according to FactSet, compared with 3.49 for the ProShares S&P 500 Dividend Aristocrats ETF
More about dividend stocks in a world of low interest rates:
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