A High Dividend ETF That Can Bounce Back

With the Federal Reserve having already raised interest rates twice this year and with plans for perhaps two more rate hikes before year-end, high-yield dividend stocks and exchange traded funds are struggling.

Sectors with bond-like traits, such as telecommunications and utilities, are among the worst-performing groups in the S&P 500 this year. Some high-yield dividend ETFs are struggling as a result. One example is the iShares Core High Dividend ETF HDV, which is off more than 4 percent year-to-date.

What To Know

As interest rates increase, it becomes harder to identify compelling dividend stocks with yields of 3 percent or more, but there are some names out there that fit that bill. Ten-year Treasury yields closed Tuesday at 2.88 percent.

“CFRA Chief Investment Strategist Sam Stovall thinks equities remain the asset class of choice and will end up recording a single-digit price rise in 2018,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday. “Meanwhile, the yield of the 10-year Treasury bond is projected to average 3.25% in the fourth quarter of 2018, up from the recent 2.9%, making it appear more challenging to spot appealing dividend-paying stocks.”

Why It's Important

Rosenbluth said CFRA identifed 83 stocks across all 11 sectors represented in the S&P 500 that have yields of 3 percent or more and are rated Buy or Strong Buy by the research firm.

The $5.71 billion HDV holds 75 stocks and tracks the Morningstar Dividend Yield Focus Index. HDV has a trailing 12-month dividend yield of 3.57 percent by way of a significant combined allocation to some high-yielding but rate-sensitive sectors. Consumer staples is the ETF's largest sector weight at 19.33 percent while the bond-like telecommunications and utilities sectors combine for almost 23 percent of the fund's weight.

HDV is one of the least expensive dividend ETFs with an annual fee of just 0.08 percent per year, or $8 on a $10,000 investment.

What's Next

Dividend growth in the U.S. remains impressive, which indicates some companies are looking to keep investors involved with their shares of government debt.

“In the first quarter of 2018, S&P 500 dividends totaled $109.2 billion, slightly down from the record of $109.5 billion from the fourth quarter of 2017,” said Rosenbluth. “Yet, according to Howard Silverblatt, index analyst with S&P Dow Jones Indices, a new record is expected for the soon to be completed second quarter.”

CFRA rates HDV Overweight.

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