Why This Defensive Dividend ETF Could Rise Again

Last year was a mixed bag for dividend-oriented exchange traded funds. Dividend growth was again solid in the United States, but high dividend strategies languished as the Federal Reserve hiked interest rates four times.

The iShares Select Dividend ETF DVY, one of the largest domestic dividend ETFs, slipped 6.3 percent last year, including dividends paid. That loss exceeds the 4.6 percent shed by the S&P 500.

What Happened

The $16.94 billion DVY targets the Dow Jones U.S. Select Dividend Index and holds nearly 100 stocks. While the ETF's 2018 performance confirms its vulnerabilities to rising interest rate, the sector rotation seen late last year could benefit defensive strategies, such as DVY.

“In the fourth quarter of 2018, investors rotated away from more growth-oriented sectors, including Information Technology, and into more defensive sectors such as Consumer Staples and Utilities,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday. “The S&P 500 Tech sector’s dividend yield was a below-average 1.5% at yearend, but consumer staples (3.1%) and utilities (3.5%) were two of the three highest-yielding sectors.”

Why It's Important

DVY has a trailing 12-month dividend yield of 3.31 percent, or 130 basis points above the S&P 500's dividend yield. Underscoring its defensive posture, DVY's three-year standard deviation of 7.49 percent is well below those found on broader domestic equity benchmarks.

DVY is a yield-weighted strategy, but its components must have minimum dividend increase streaks of five years. The fund devotes over 32 percent of its weight to the utilities sector while consumer discretionary and energy stocks combine for 23.76 percent of DVY's roster. None of DVY's components exceed weights of 2.17 percent, indicating single-stock risk is limited within the fund.

What's Next

“Investors added $8.3 billion to dividend-focused ETFs in the final quarter, after removing $3.1 billion in the first nine months of the year,” said Rosenbluth. “These ETFs provide exposure to multiple sectors, providing diversification benefits. Fourth-quarter dividend increases occurred in sectors that sport below-average and above-average yields.”

Investors added $1.24 billion to DVY in the fourth quarter. CFRA has an Overweight rating on the iShares ETF.

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