As has been frequently lamented, not much is working in equity markets this year. Add to that, “working” is becoming a matter of perspective with the perspective often being “less bad” is certainly better than the alternative.
In the less bad camp are high dividend and low volatility strategies. Fortunately, there are avenues for advisors to efficiently combine these concepts in client portfolios without committing to significant legwork. Good news: There are indexes and as such, exchange traded funds, dedicated to the marriage of high dividend stocks with favorable volatility traits.
It’s a good time to evaluate those strategies. Dividend growth – a fine avenue for fighting inflation – confirms as much as does rising broader market volatility. Adding to the allure of the big dividend/low volatility combination is that the related strategies are usually chock full of defensive and value stocks and light on growth equities. This year, that’s the right combination and with the value resurgence still in its early innings, the dividend/reduced volatility marriage could be a fruitful for some time.
Obviously, performance matters and on that note, it basic broad market indexes, including the S&P 500, failed dramatically in the first half of 2022. In better news, the opposite was true of high dividend/low volatility strategies.
“However, not all equity indices suffered comparable losses, and one such example is the S&P 500 Low Volatility High Dividend Index. In fact, this index has outperformed by a wide margin so far in 2022,” note S&P Dow Jones Indices.
As its name implies, that benchmark embraces both reduced volatility and high equity income. In other words, it’s right for the current environment and it’s performing as such.
“This may come as no surprise since this index combines two strategies that have individually beaten the S&P 500 YTD,” adds S&P. “High dividend strategies have been popular in the recent market environment of high inflation and rising interest rates, where current income and shorter duration stocks are considered more favorable by some investors. Similarly, low volatility stocks have outperformed due to their defensive qualities during increased market uncertainty.”
Explaining the index’s methodology to client isn’t difficult. The gauge is comprised of the 75 S&P 500 components with the highest dividend yields and the lowest trailing 12-month volatility. While that strategy is appropriate today, it also has a compelling long-term track record.
“The index has delivered higher absolute and risk-adjusted returns than the S&P 500 since January 1990. Furthermore, it has had a lower downside capture ratio than similar high-yielding strategies since the low volatility screen acts as a quality measure to avoid high-yield stocks with sharp price drops,” notes S&P.
With high dividends and low volatility being a combination, there are other, pairings, too. There’s high volatility with high yield and, on a standalone basis, there’s pure high-yield equity income.
Some clients may be aware of alternatives to high dividend/low volatility so it’s on advisors to convey the best choice. Fortunately, that’s easy to do.
“Finally, the high volatility/high-yield portfolio was much more volatile, with the lowest risk-adjusted return and largest maximum drawdown. Thus, out of these three hypothetical portfolios, the low volatility/high-yield portfolio delivered the highest risk-adjusted return and had the most pronounced maximum drawdown reduction,” concludes S&P.