The current low interest rate environment has been difficult for income-oriented investors. Traditional fixed-income investments, such as certificates of deposit, money market funds and longer dated bonds, are not producing appreciable yield, especially in taxable accounts. Dividend-paying stocks tend to be less volatile than the overall market. In addition to regular dividend payments, these stocks also have the potential for capital appreciation. Dividends instill discipline on company management while encouraging the prudent use of capital resources.
WisdomTree High Dividend (DHS) ETF offers a practical alternative to traditional fixed-income investments. DHS also pays dividends monthly, making it a compelling option for retired investors in search of steady income payouts.
Investment Strategy
Designed to track a benchmark comprising the highest-yielding 30 percent of dividend-paying stocks, DHS follows a dividend-focused strategy. It minimizes risk by weighting selections based on the stock’s proportional income to the total amount of dividends paid. The companies that pay out the largest dividend amounts tend to be larger-cap firms that experience less volatility than the typical high-yield stocks. This fundamental “dividend of a dividend” approach offers a strong indicator of the underlying value of the payout. The strategy is designed to give investors a higher return relative to the same amount of risk. It also has a greater tilt toward companies that are considered undervalued, and have a greater potential to outperform, as compared with the portfolios of other large-value funds.
While the current value tilt of DHS is less than it has been in the recent past, the fund still seeks out higher-yielding but potentially riskier stocks. The benchmark index requires that companies have paid out a dividend only over the past 12 months. This standard enables the fund managers to cast a wider net to include large companies that have only recently begun to return profits to shareholders. DHS invests in some of the market’s largest and most liquid dividend-paying companies.
Portfolio Construction
Because of its investment and rebalancing strategies, the fund naturally shifts toward the market’s highest-yielding stocks and sectors. As a result, DHS is currently underweight financials and overweight sectors that offer higher yields, such as energy, telecommunications and utilities. The fund’s concentration in these sectors is higher than the category average as well as that of comparable funds such as the five-star Morningstar-rated Vanguard High Dividend Yield Index Fund (VYM). DHS also has a large exposure to real estate, while VYM has a minimal exposure to that market sector. VYM has a higher exposure to industrial and technology shares compared with the higher consumer staples concentration contained within the DHS portfolio.
DHS has a 50.56 percent exposure to giant-cap shares as well as 27.87 and 14.56 percent allocations to large- and medium-cap companies, respectively. The fund has less than a 7 percent exposure to small- and micro-cap shares. Slightly less than 36 percent of assets are in the top 10 holdings. These include AT&T, ExxonMobil, Verizon, Chevron and General Electric as well as Procter & Gamble, Wal-Mart, Pfizer, Philip Morris and Merck. The fund has 37 percent of its assets in companies with a wide economic moat rating from Morningstar. This compares with the 53 percent of VYM. A wide economic moat indicates that the company has a sustainable economic advantage.
Despite the difference in the quality of the stocks in the DHS portfolio, they are not more attractively priced. The ETF has a forward P/E ratio of 18.1, which is higher than the 17.3 ratio for the Russell 1000 Value Index. Stocks in the fund also have a debt/capital ratio that is 28 percent higher than the ratio of the Standard & Poor’s (S&P) 500 index.
Performance and Risk
The fund has a high four-star Morningstar return rating. Over the past 1-, 3- and 5-year periods, DHS has generated total returns of 24.73, 13.45 and 15.28 percent, respectively. These compare with the category returns over the same time frames of 16.19, 11.30 and 14.76 percent, respectively. The fund has a 12-month yield of 3.19 percent compared with the 2.99 percent and 2.09 percent respective yields for VYM and the S&P 500. While DHS has a 3-year beta and standard deviation of 0.84 and 9.56, the comparable numbers for VYM are 0.96 and 10.15. The lower correlation and lower volatility are mainly due to the larger weights in the telecommunications and utilities sectors. The last distribution occurred on August 22 for 0.185 per share with a reinvestment price of $67.
Suitability
The fund is a good option for investors who seek a targeted exposure to high-yielding domestic equities. It can be used to replace or complement passive and active large-cap value and dividend-oriented investment strategies. The ETF also satisfies the demand for potential growth as well as current income. The fund has a lower correlation to the S&P 500 index, which indicates that it has greater diversification. Although the inclusion of DHS in a well-balanced portfolio may lower overall risk as it generates high yields, the ETF is a riskier stand-alone ETF than a typical large-cap blend fund.
The search for yield may cause the fund to tilt more toward distressed firms that may not be able to sustain their dividends, especially during a downturn. The fund suffered higher percentage losses than did the overall market during the recent financial crisis. Another drawback is the 0.38 percent expense ratio, which is higher than the category average and significantly higher than the 0.09 percent expense ratio of VYM. Because of its potential risks, DHS may be best suited as a satellite, rather than a core holding, for those looking for current income.