With interest rates still elevated and market participants questioning when and how many, if any, rate cuts the Federal Reserve will deploy this year, some advisors and investors may be apprehensive about high dividend equities.
That’s understandable because many of the exchange traded funds focusing on equities with above-average payout yields are heavily allocated to rate-sensitive sectors, including real estate and utilities. However, some market observers believe the tide is starting to turn for high dividend names. That could be good news for ETFs such as the WisdomTree US High Dividend Fund (DHS).
The $1.06 billion turns 18 years old in June and follows the WisdomTree U.S. High Dividend Index. Year-to-date, the ETF, which sports a distribution yield of 4.26%, is higher by 3.2%. While that trails the S&P 500, that tide could turn as the economy firms – a scenario that could favor high dividend fare.
Economic Indicator Could Bode Well for DHS and High Dividend Stocks
In what could be good news for DHS and high-yield equities, Bank of America noted the March reading of its U.S. Regime Indicator showed its strongest levels in almost three years. That could favor big dividend stocks, according to equity and quant strategist Savita Subramanian.
“High Dividend Yield has led 88% of the time during prior Recoveries. This factor remains inexpensive and neglected as well … and could be a beneficiary of income investors’ flows if the Fed begins to cut rates,” she wrote in a report to clients last week.
Indeed, DHS has some leverage to the concept of lower rates because the ETF allocates about 19% of its weight to utilities and real estate stocks. However, the ETF’s methodology focus on expected cash payouts, not yield. That can mitigate some of the risk associated with capital-intensive sectors known for above-average payout yields.
In fact, Bank of America’s Subramanian cautioned against owning the highest of the high-yielding stocks, encouraging investors to focus on the next tier down in an effort to find higher quality names. That group includes some DHS holdings.
DHS allocates about 44% of its combined weight to the financial services and energy sectors. Financial services is a cyclical group indicating that if the economy remains firm, banks can keep less cash aside for loan-loss reserves and deploy more of that capital toward shareholders. Regarding energy, oil prices are high, balance sheets are strong and payout ratios are manageable, indicating that sector could be a source of strength for DHS going forward.
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