A Yield-Generating ETF That Adapted to Changes in the Dividend Landscape
This article was originally published on ETFTrends.com.
Dividend ETFs have been a popular play but have quickly soured this year. Nevertheless, there are some alternative dividend strategies that may help investors meet their income needs.
"Many ETFs, Dividend ETFs in particular, have underperformed this year," David Mazza, Head of ETF Investment Strategy and Beta Solutions at OppenheimerFunds, said at the 2018 Morningstar Investment Conference. "I looked at U.S. equity funds that yield more than the S&P 500, and 84% of those 90 [ETFs] have underperformed, some significantly."
Previously, in an environment of low interest rates, people piled into alternative yield-generating investments, like dividend stocks, that helped bolster their income portfolios.
Those same popular dividend ETF plays, though, are tilted toward defensive, bond-esque like stocks, such as consumer staples or utilities.
"In the face of rising rates, they tend to do worse," Mazza said.
Consequently, many dividend investors were burned this year as the play petered out and sectors like consumer staples and utilities began to under perform in light of the Federal Reserve's tighter monetary policy.
Nevertheless, some investors still need fixed-income investments and the demand for income is not going away any time soon.
"People still need to look at strategies in the dividend space, and they're going to have to peel back the onion a bit because the traditional ones have been loaded with a lot of these bond-like stocks," Mazza added.
As an alternative way for income seekers to generate yield, one may look at something like the Oppenheimer Ultra Dividend Revenue ETF (RDIV) . RDIV is up 7% year-to-date, making it one of the best-performing dividend ETFs this year. RDIV also shows a 5.03% 12-month yield.
RDIV’s revenue-weighted methodology can help investors avoid expensive stocks and tap into the value factor at a time when some market observers are betting value stocks are poised to rally.
Revenue weighting could provide diversified exposure to the market, is not influenced by stock price, reflects a truer indication of a company’s value and offers stable sector exposure. Moreover, revenue weighting may provide a more value-oriented portfolio and historically outperformed in a value-driven market while showing lower drawdowns during growth-driven markets.
RDIV “invests in the securities in the S&P 900 with the highest trailing dividend yield. Each of these securities is then weighted by top line revenue, instead of market capitalization,” according to Oppenheimer.
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