High interest rates – the condition investors have had to contend with for over two years now – can be a drag on dividend stocks and some of the related exchange traded funds. That’s particularly true of high payout strategies, many of which lean heavily into rate-sensitive sectors such real estate and utilities.
Relief could be on the way because speculation is intensifying that the Federal Reserve could lower interest rates at its September. Previously, the consensus wisdom held that the Fed would lower rates by 25 basis points in September, but following a weaker-than-expected July jobs reports, some experts believe the central bank could cut by 50 basis points to prop up the economy.
Either scenario could provide support to ETFs such as the WisdomTree US High Dividend Fund (DHS ). The $1.12 billion DHS could have some advantages should the Fed enter in a new easing cycle. Those include favorable sector mix and some interesting historical precedent.
With Fed Help, DHS Could Thrive
DHS sports a 30-day SEC yield of 3.75%, but higher yields are available on some relatively safe fixed income funds (and cash) and that explains some of the lethargy faced by the ETF and high dividend stocks in general.
To its credit, DHS has managed to rise 8.57% year-to-date and the ETF could gain some momentum if the Fed pares rates because cash instruments and some bonds would lose luster relative to dividends stocks. There’s also some interesting history that could support the near-term case for DHS.
“Dividend Payers have outperformed Non-Payers in first nine months of easing cycle,” according to Ned Davis Research. “In theory, Dividend Payers should benefit from an easing cycle because lower interest rates mean that bonds offer less competition for yield for income-seeking investors.”
The research firm added that one of the primary reasons the Fed often lowers rates is to fight slowing economic growth. That could be the case this time around because in July, the unemployment rate jumped to 4.3% from 4.1%. Slower growth environments are often conducive to exposure to defensive sectors such as consumer staples, healthcare and utilities. In order, utilities, consumer staples and healthcare stocks combine for more than 38% of the DHS roster.
Another potential catalyst for DHS could be the pace at which the Fed cuts. Translation: the more aggressive the Fed is, the better it could be for the ETF’s holdings.
“While High Yielders have outperformed during the first four months of fast easing cycles, they have underperformed early in slow easing cycles. Their low betas have proven to be less beneficial when the S&P 500 has rallied sharply during the initial months of slow easing cycles,” adds Ned Davis.
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