A High Divided ETF Confronts The Fed

The Global X Funds DIV invests in high dividend stocks. As seasoned dividend investors know, high dividend stocks can be vulnerable to rising interest rates.

Still, DIV mustered a 2016 gain of 10.6 percent, though that lagged the 12 percent returned by the S&P 500. Kudos to DIV for being slightly less volatile than the benchmark U.S. equity index.

DIV, which debuted in the first quarter of 2013, tracks the Indxx SuperDividend U.S. Low Volatility Index. In addition to featuring high-yielding stocks, DIV's index searches for those names that have displayed low betas against the S&P 500.

Interest Rate Hikes And DIV

The Federal Reserve raised interest rates for the only time in 2016 in December and is aiming for three rate hikes this year, but that does not mean DIV should fall out of favor.

“Despite the recent upswing in 10 year US treasury yields, we saw that many high dividend paying stocks responded neutrally or mildly positively,” said Global X in a recent note. “We found a slight positive correlation between the SuperDividend suite of ETFs prices and 10 year US treasury yields, indicating that as 10 year US treasury yields increased, there was a slight increase in the prices of the SuperDividend ETFs. The chart below [available at the previous link] also shows the correlations of the 10 year US treasury yields to the price changes of the broad US fixed income benchmark.”

DIV's stablemates include the Global X Funds SDIV and the Global X MSCI SuperDividend Emerging Markets ETF SDEM, among others.

DIV's Alternative Asset Class Exposure

While DIV allocates more than 22 percent of its weight to utilities stocks, its largest sector weight, the ETF also features exposure to alternative asset classes such as mortgage real estate investment trusts (mREITs) and master limited partnerships (MLPs). Those high-yielding asset classes combine for over 34 percent of DIV's lineup, according to issuer data.

Over time, reinvesting dividends from high-yield stocks has the potential to bolster a portfolio's total returns. In turn, that notion bolsters the case for long-term investors to consider an ETF like DIV.

“We have conducted research on the performance of high dividend payers in a rising rate environment and found that high dividend payers tend to perform well in environments where interest rates are increasingly gradually. This relationship is due to the fact that high dividend payers exhibit value characteristics and tend to benefit from a strengthening economy with mild inflation, which is often the case when 10 year treasury yields are moderately increasing,” added Global X.

The $351.3 million SDIV has a trailing 12-month distribution rate of almost 7 percent.