Don't Write Off High Dividend ETFs Just Because Rates Are Rising

Conventional wisdom holds that high dividend stocks and the related exchange traded funds can be hindered by rising interest rates.

That scenario is at play in 2018 as the Global X SuperDividend U.S. ETF DIV and the Dow Jones U.S. Select Dividend Index are up an average of 2 percent, including dividends paid, compared to 3.8 percent for the S&P 500.

What Happened

Historical data indicate high-yield dividend payers can betray their reputations, in positive fashion, as the Federal Reserve boosts borrowing costs. From 1960 through 2017, the total return for high dividend payers outpaced the S&P 500 by 3 percent on an annualized basis, according to Global X research.

Still, there are instances when it can take some time for high dividend payers to regain their luster after enduring punishment at the hands of a tightening Fed. Over the past three years, DIV, which tracks the Indxx SuperDividend U.S. Low Volatility Index, is trailing the S&P 500 by a wide margin.

Why It's Important

“Across rising interest rate regimes, high dividend stocks outperformed the market by an annualized average of 0.80%,” according to Global X. “High dividend stocks outperformed the market in 7 out of the 10 observed rising interest rate regimes.”

Where high dividend strategies like DIV can encounter difficulty in rising rate environments is when the pace of Fed tightening is deemed as quick by the market. The three rising rate climates where high dividend stocks lagged the S&P 500 were home to rapidly rising rates. This time around, the Fed has raised rates eight times since 2018, including three times this year with a fourth rate increase likely coming in December.

DIV has a trailing 12-month dividend yield of 5.97 percent, buoyed by exposure to a slew of high-yield, rate sensitive asset classes and sectors. Utilities stocks and mortgage real estate investment trusts (REITs) combine for over 41 percent of the fund's weight while master limited partnerships (MLPs) account for 15.68 percent.

What's Next

“Although interest rates are expected to continue to rise in the near future, many economists expect these increases to be gradual, creating a slow rate increase environment that has historically led to high dividend stocks outperforming the broad market,” according to Global X.

The $413.41 million DIV, which is over five years old, pays a monthly dividend.

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