Thanks to the low rate environment, former sources of reasonable yield like Treasury bonds no longer pay investors an adequate amount of income. As a result, many have looked to dividend paying securities, and especially high yielding ETFs, to fill the gap.
ETF providers have certainly stepped up to meet this demand, and arguably, the space has been beaten nearly to death with a wide range of both ETFs and ETNs that seek to give investors high income in any number of ways. These include products that have a narrow focus on high yield segments like mortgage REITs or BDCs, while others have taken a more global approach, looking for big payouts from around the world.
Of these ETFs that have a global focus on high yield securities, one stands out as not only a yield king but a potential portfolio cornerstone; the Global X SuperDividend ETF (SDIV). Yet despite the many benefits that the fund has, the product is usually overlooked in favor of more ‘popular’ products which often pay but a fraction of the yield that investors have seen in SDIV.
If anything, it is because SDIV has been something of a victim of its own success as many view the high yield as almost too good to be true. After all, the product currently has a 30-Day SEC payout of 6.7% while the 12-Month Dividend Yield is above 7.6%, thoroughly crushing many other ETFs in the segment (read the Guide to 10 Great ETFs Yielding 7% or More).
Given this, it is usually assumed that the product is focusing in on high risk, high volatility securities exposing income investors to a great deal of uncertainty in the process.
High Dividend ETF Myths
However, this isn’t really the case, as Global X and industry research from RidgeWorth Investments shows that, unlike in the bond world, a higher payout actually decreases volatility and boosts the total return (their research shows that the highest dividend quintile has the highest Sharpe ratio too).
Furthermore, due to the stigma attached to many super high yielders, the space can be overlooked or underfollowed when compared to stocks that have payouts in the 3%-6% range. Since many of these stocks in this modest high yield range have been gobbled up by income focused investors, those above that level, which are what SDIV focuses on, could still be trading at relatively good valuations, making the product not just a yield play but a value one as well.
If that wasn’t enough to dispel some of the myths surrounding this high yield ETF, investors should also note that the product is very well spread out in its portfolio as well. The ETF utilizes an equal weight approach, giving just about 1% to each of the roughly 100 stocks that comprise SDIV’s portfolio (read Three Overlooked High Yield ETFs).
This technique ensures that even if there is a blowup in one or two companies, it will not dominate the overall return of the product. Additionally, the index provider will only be looking at stocks that have a high likelihood of continuing their solid payout levels; anyone that cuts or eliminates a dividend is immediately removed from the index.
The portfolio is also well diversified across sectors and nations too, with the U.S. accounting for roughly one-third of the assets, followed by Australia, and then the UK. From a sector look, REITs do take the top spot, while telecoms, financials, and consumer discretionary stocks also receive a double digit weighting as well (read Invest Like the One Percent with These Three ETFs).
While some might be wondering why Australia receives such a large allocation, according to Bruno del Ama, CEO of Global X, the high Australian exposure is due to the country’s favorable tax treatment of dividends. This, along with the high interest rate in the nation, puts a great deal of pressure on company managers to pay out a great deal in dividends, making many Australian stocks components of the SDIV portfolio.
Lastly, investors should also note that the product represents a middle of the road choice in terms of fees as the total cost is just 58 basis points a year. This comes after the fund abandoned BDCs, thus eliminating the acquired fund fees and effectively reducing the total cost of the fund to investors by nearly half (see Closed End ETFs for Forgotten 7% Yield?).
Clearly, even when taking into account the fees, SDIV is an impressive destination for yield. While targeting high yielders for lower volatility may seem counter intuitive—especially given the bond market woes in Europe— the same trends that hold true for bonds do not carry over to the equity market.
After all, as del Ama continued, “When investors are demanding high amounts of current income, managers have to be more disciplined with their capital. They cannot afford to waste money on low ROI projects given how much income their investors are demanding”.
High Yields in the Future
Del Ama also discussed how these super yielders could benefit in what he termed the current ‘supercycle’ which has put a premium on high yielding securities. “We believe high dividend yielding securities will perform better over many years as baby boomers look for sources of income in this low interest rate environment, and we expect capital to continue to flow to high yielding equities for a long time
The Global X CEO is also optimistic that this cycle will last longer for super dividend equities. ‘Let’s say that T-bill rates return to more historic levels around the 4% mark. Investors in stocks yielding around this level might consider abandoning their stocks for less volatile Treasury instruments, but less people is going to give up 8% yields for 4% payouts.”
Since even four percent mid-term Treasury bond yields seem to be a ways off, it doesn’t seem like it is too late for investors to consider adding more yield to their portfolios. Given some of the benefits that ‘super’ high yield securities have in terms of volatility and their potential long term strength, these could be the ones to target in today’s environment in which many ‘regular’ dividend payers have been bid up to excessive levels (read 3 Excellent ETFs with more than 4% Yield).
With this backdrop, the pretty stable SDIV could be an excellent choice. Investors certainly won’t be disappointed with its yield, and they will likely be surprised at how stable the high yielder is when compared to comparable products that put up similar levels of current income, potentially offering up investors the best of both worlds in this yield-starved environment.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Follow @Eric Dutram on Twitter
Today, at 11:20 AM PT: Get the Market Movements in Advance: William's Edge Webinar for October 31st, 2014 | John Ransom
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for October 29th, 2014 | John Ransom