With the Federal Reserve signaling interest rate cuts are a legitimate possibility this year, Treasury yields are declining, increasing the allure of dividend stocks and exchange traded funds in the process.
While the current outlook for stocks is sanguine, investors looking to hedge equity positions while gaining an income kicker may want to consider the Hedged Dividend Income ETF (DIVA ).
Up nearly 4% this year, DIVA tracks the INDXX Hedged Dividend Income Index, which is designed to deliver to investors a strong current yield capital appreciation potential with a risk profile similar to a corporate bond index, according to AGFIQ. The fund yields 4.73%.
Diversification and the inclusion of alternative investments have become more important as a traditional stock and bond portfolio mix may not provide the same type of returns investors have been accustomed to. With interest rates poised to remain low, DIVA could prove to be a viable alternative this year to traditional high dividend strategies.
Allocating strategically to proven equity market hedges is one way to potentially insulate a portfolio from unexpected market events and help compound wealth.
Dive Into DIVA
DIVA holds 100 equally weighted securities within the universe of the largest 1000 US stocks that have paid consistent or growing dividends and which have the highest dividend yields. Additionally, the fund shorts approximately 150 to 200 stocks, within the same universe, that have the lowest-to-no dividend history and low yields. Due to its indexing methodology, investors may find higher yields than dividend stocks while potentially hedging against volatility of equity markets.
The equal-weight methodology helps limit single stock risk and can potentially reduce volatility relative to broad market indexes and traditional dividend strategies. The fund has an admirable mix of high dividend and dividend growth sectors as energy, financial services, real estate and utilities are DIVA’s largest sector allocations.
That sector mix is important because energy and financial services are expected to be key drivers of dividend growth this year while real estate and utilities are historically inversely correlated to interest rates, meaning DIVA has another avenue for taking advantage of a potential rate cut.
For more investment strategies, please visit our Relative Value Investing Channel.
