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Regardless of Thursday’s announcement, rates will be low for a while. Utility stocks have taken a beating, and seem poised for a rebound. Dividend funds are a long-term trend that is not going away. The purpose of this article is to determine the attractiveness of the iShares Select Dividend ETF (NYSEARCA: DVY ) as an investment option. To do so, I will review DVY’s recent performance, current holdings and weightings, and trends in the market to attempt to determine where DVY may be headed for the rest of 2015, and in to the new year. With the Fed’s meeting tomorrow regarding interest rates, investors may want to initiate positions ahead of their announcement. First, a little about DVY. The Fund seeks investment results that correspond with the price and yield performance of the Dow Jones U.S. Select Dividend Index . The Index is generally made up of companies with relatively high dividend yields and that have maintained these yields for a long stretch of time, the minimum being 5 years. Because of its diversity and inclusion of only high dividend payers, DVY is not representative of the general market and or the DOW as a whole, but is weighted towards certain sectors specifically. DVY is currently trading at $73.87/share and pays a quarterly dividend of $.65/share, which translates to an annual yield of 3.52%. The fund has struggled in 2015, heading lower with the market as a whole. Year to date, DVY is down about 7%, excluding dividends. This compares to a drop of about 6.5% in the Dow Jones Index (NYSE: DOW ), a popular benchmark. Given its yield, DVY has slightly outperformed the DOW, but it is important to consider the Fed’s influence on the market before deciding to invest in DVY going forward. There are a few reasons why I like DVY, regardless of what the Fed decides to do, as I see the fund performing strongly in either scenario. First, if the Fed decides to not raise rates after tomorrow’s meeting, high-yielding safe sectors like utilities should outperform, as investors will scramble back into those stocks to earn that higher yield. This is important for DVY because the fund has a weighting of almost 33% towards the utilities sector . Over the past few years this sector has rallied each time the rate increase is delayed, or when there is speculation that it will be delayed. And this type of delay is precisely what most traders are betting on this time around, as most traders are betting the central bank will not increase rates at its Sept. 16-17 meeting. Traders are pricing in a 28 percent chance of action on Thursday. Odds of a move at the December gathering are about 59 percent, according to data compiled by Bloomberg. Given the very real possibility of a September delay announcement by the Fed, investors could profit by getting in to DVY ahead of time. Second, I also believe DVY should perform well even if the Fed does decide to raise rates. I believe this is the case because the increase is sure to be modest, and will likely not be followed by another increase this year. Because of this, investors will continue to be subject to ultra-low rates by historical standards, and will continue to look at dividend-focused exchange traded funds, as has been the long-term trend for years now. While most investors are increasingly conflicted about whether or not the Fed will raise rates, the amount of the increase, if it happens, seems to have a consensus that the rise will be to .25%, with a small possibility of .50%. Given that DVY is currently yielding 3.50%, and has the potential of price appreciation through stock gains, the potential return of this fund will still beat investing in U.S. Treasuries. Of course, investing in DVY is not without risks. As the past few months have shown, the Fed’s action (or lack thereof) on interest rates can heavily influence the markets. If the Fed decides to raise rates more aggressively than anticipated, funds like DVY will fall, and fall sharply, given that most traders are betting on the Fed being more dovish. Additionally, dividend funds have been falling out of favor with investors over the course of 2015, as some investors are predicting the years-long bull run for these funds to be ending. Data compiled by Bloomberg has shown outflows for popular dividend funds like DVY, and others, over the course of 2015. However, these are not scenarios I expect to occur. The Fed has been very straightforward about their intentions, and I do not believe they have any desire to “spook” the market with a large increase. I also expect, for reasons I outlined in the above paragraph, for the trend towards dividend ETF’s to continue to be profitable going in to the new year, as rates stay historically low for at least another six months. Bottomline: The market has undergone some volatility over the last few months and trended lower, and DVY has not been immune to this trend. However, the drop in stock price has pushed DVY’s yield above 3.50%, and offers a reasonable value while trading at 12.5 times earnings. The fund has suffered disproportionately as investors fret over a coming rate hike, but the rate hike will be small and could very well be delayed. If so, investors will look to get back in to DVY and similar funds as safe, high-yield alternatives will continue to be scarce. With a above-average yield and a beta of only .69 (indicating it is less volatile than the market as a whole), DVY provides investors with a relatively safe play to ride out any forthcoming volatility. I would encourage investors to take a serious look into this fund, regardless of the Fed’s decision this week. Disclosure: I am/we are long DVY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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