Don't Diss Dividends

Scores of countries currently sport negative interest rates, and the United States is far from impressive on that front with 10-year Treasury yields of 1.61 percent. So, it can be said that any obituaries written for dividend stocks and exchange-traded funds were done so prematurely.

While it is not cheap to chase yield, income-starved investors must also embrace valuations that often run well in excess of the broader market. That is currently the case as the combination of still low interest rates in the U.S. and investors' thirst for less volatile asset classes this year is pumping up valuations on defensive groups.

Dividend Plays Aren't Dead

The case for an ETF such as the iShares Core High Dividend ETF (iShares Trust HDV) grows stronger when noting HDV yields 3.54 percent on a trailing 12-month basis, or more than double the aforementioned yield on 10-year Treasurys.

Related Link: Some Positive Indexing News For A Frontier Markets ETF

HDV follows the Morningstar Dividend Yield Focus Index, which is designed to provide exposure to highly liquid, high-yield dividend payers.

Although HDV meets the qualifications of a high dividend ETF, the fund is not excessively to the highest-yielding and the most interest rate-sensitive sectors. For example, utilities and telecom stocks combine for just over 14 percent of the ETF's weight. However, HDV's 18.4 percent to consumer staples names is in line with what investors would expect from a high dividend ETF.

HDV's small utilities weight helps keep the ETF's valuation close to the S&P 500. Utilities stocks are expensive. In a note out earlier this month, Goldman Sachs said the sectors trades at a premium to the S&P 500 based on 2017 and 2018 earnings estimates and that utilities' forward price-to-earnings ratio is higher compared to its five-year average.

Of Rates And Growth

“High-dividend stocks have outperformed dividend growers in the past year, but our analysis shows they historically have been vulnerable to higher rates. Dividend growers, by contrast, tend to perform well in a gradually rising rate environment. They tend to have more rate-resilient characteristics, such as strong balance sheets, and benefit from a growing economy,” said BlackRock in a recent note.

HDV has some exposure to oil prices by way of an almost 21 percent allocation to the energy sector, the sector with most negative actions in the S&P 500 dating back to last year. Still, HDV's three-year standard deviation is less than 9.8 percent and several of the ETF's top 10 holdings have dividend increase streaks that can be measured in decades.

“We like companies with lower pay-out ratios and strong cash flows, at a time when pay-out ratios are historically high. We see attractive dividend-growth opportunities in global pharmaceuticals, international telecom, emerging market (EM) infrastructure and selected information technology companies,” added BlackRock.