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VYM: High-Quality Dividend Investing To Mitigate Volatility In Uncertain Markets
Summary The dividend space offers many long quality attributes: decreased volatility, healthy yields, moderate risk and a hedge against downside risk in the face of uncertain market. High-quality dividend investing often gives rise to share buybacks, rendering an effective way to further drive shareholder value via returning capital to shareholders by repurchasing stock. VYM has outperformed the S&P 500 in past two down markets in 2008 and 2011 by 4.9% and 8.4%, respectively. VYM has more than doubled its dividend payouts over the past 5 years giving rise to a superior cash flow and yields. Introduction: Dividend investing lacks trading excitement when compared to high-flying stocks such as Netflix (NASDAQ: NFLX ), Facebook (NASDAQ: FB ) or Amazon (NASDAQ: AMZN ) or sectors on a whole such as the biotechnology sector. Despite this lack of excitement, when considering the long attributes the dividend space offers, such as decreased volatility, healthy yields, moderate risk exposure and a hedge against downside risk, it may be an ideal synergy for any long portfolio. This is exemplified as the markets have been highly volatile due to weakness in China, an imminent fed rate hike and persistently low oil prices. Historically, companies that have an established track record of not only paying dividends but growing their dividends over the long-term have generally outperformed the their respective index with decreased volatility. I will be utilizing the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) as a proxy for a high-quality cohort of large-cap centric dividend paying stocks. This type of dividend portfolio may prove to be a meaningful piece of an overall growth retirement strategy while providing a reasonable level of income and mitigating risk. The allocation within VYM offers a broad dividend paying portfolio and access to all sectors throughout the large-cap space without sacrificing diversification and in turn can generate sustained long-term growth and income while navigating volatile markets. Mitigating risk and volatility with a high-quality cohort of dividend paying stocks: VYM is composed of high yielding dividend-paying large-cap companies and weighted by market capitalization. This domestically focused dividend paying ETF provides access to some of the biggest names across many different sectors that provide a healthy dividend yield, equity appreciation, diversification and decreased volatility. These domestically centric companies may provide additional protection when largely extraneous events are impacting U.S. markets. The top 10 holdings consist of high-quality companies: Exxon Mobile (NYSE: XOM ), Microsoft (NASDAQ: MSFT ), Johnson & Johnson (NYSE: JNJ ), Wells Fargo (NYSE: WFC ), General Electric (NYSE: GE ), Proctor & Gamble (NYSE: PG ), JPMorgan Chase (NYSE: JPM ), Pfizer (NYSE: PFE ), AT&T (NYSE: T ) and Verizon Communications (NYSE: VZ ). These top 10 holdings make up roughly 30% of the portfolio by weight and covers technology, energy, healthcare, industrials, financial and consumer defensive. The vast majority of companies that comprise the ETF portfolio are large-cap companies spanning value, blend and growth. Large value and blend categories account for roughly 75% of the portfolio holdings. Outside of these top 10 holdings, high-quality companies reside in market capitalization weighted proportions across a broad range sectors in its top 25 holdings (Figure 1). (click to enlarge) Figure 1 – Morningstar top 25 dividend paying holdings for VYM Decreased volatility and outperformance during bear markets: As a consequence of its high-quality dividend paying centric portfolio, the ETF has a majority of its holdings in more robust and financially stable companies that are the least impacted during economic turbulence domestically and abroad. The ETF specifically focuses on large-value companies within consumer defensive, health care and utilities. The weighted allocation within VYM that is dedicated to consumer defensive, health care and utilities is 14.7%, 12.4%, 7.7%, respectively. This defensive position equates to approximately 35% of the portfolio by weight (Figure 2). In terms of performance throughout bear markets, VYM has outperformed the S&P 500 in 2008 and 2011 by 4.9% and 8.4%, on an annualized basis respectively (Figure 2). These data exemplify the risk mitigation that is commonly intrinsic throughout large cohort of high-quality dividend paying stocks. (click to enlarge) Figure 2 – Morningstar sector breakdown of VYM (click to enlarge) Figure 3 – Morningstar annual returns of VYM relative to the S&P 500 index The potential duel synergy of dividends and share buybacks: Many of the companies within the VYM portfolio not only offer a dividend but also reward shareholders via share buybacks. Share buybacks can serve as an effective way to drive shareholder value via returning capital by repurchasing its own stock. I’ll discuss this dual synergy in greater detail in my part 2 of navigating volatile markets covering companies that engage in share buybacks. In brief, theoretically, repurchasing and retiring shares satisfies many pro-shareholder objectives: Reducing the number of shares tilts the supply and demand curve thereby removing shares will decrease supply and in turn increase demand and drive the share price higher. Earnings per share increase since earnings are now divided over fewer shares. If share buybacks are coupled with a dividend, the dividend yield may increase as long as the aggregate quarterly payout amount remains unchanged and as a result the payout will be divided over fewer shares. Microsoft and Wells Fargo are great examples of stocks within the ETF that reward shareholders with dividends and share buybacks. A number of constituents within the ETF help to drive share value with share buybacks while the aggregate holdings payout a dividend yield of 2.8% to augment total return. VYM provides a competitive yield to augment the growth component of the ETF, thus appears to be attractive as a potential candidate for any long portfolio. Established track record in dividend payouts and dividend increases to augment total return: VYM boasts an impressive dividend yield, currently greater than 3% which rivals the majority of high-quality dividend paying stocks. This can be a very effective residual payout to augment total return when reinvesting the dividend distributions over time. Many companies within the ETF have a well-established track record in dividend payouts and dividend growth over time. Bristol-Myers Squibb Co (NYSE: BMY ), AT&T, Verizon, Coca-Cola (NYSE: KO ) and Phillip Morris (NYSE: PM ) are just a few examples of companies within VYM that have regularly increased their dividend payout over the last 15 years. Taken together, this ETF portfolio is comprised of high-quality constituents that have a proven track record of consistent dividend payments and dividend growth. These two attributes can make a meaningful impact as part of any overall long portfolio strategy. Overall, the dividend payout per share of VYM on a quarterly basis has increased from $0.23 in March of 2010 to $0.56 in June of 2015 an increase of over 140% in dividend payouts (Figure 4). (click to enlarge) Figure 4 – Google Finance dividend distributions and cumulative returns over the previous 5 years VYM has yet to differentiate itself in the choppy market of 2015 Despite the mitigation attribute, VYM has not outperformed the broader indices (Figure 5). This may be attributable to its allocation in oil related stocks such as Exxon Mobil, Chevron (NYSE: CVX ), ConocoPhillips (NYSE: COP ), Valero Energy (NYSE: VLO ) and other energy and industrial related holdings. These sectors have been plummeted over the past six months along side the decrease in oil. This has been exacerbated by the strong dollar and weakness abroad for many international companies that reside in this ETF. Once the global economy regains its footing and the dollar normalizes against a basket of currencies, this ETF will likely regain its historical quality attributes of volatility and risk mitigation. (click to enlarge) Figure 5 – Morningstar annualized performance of VYM relative to the S&P 500 and Morningstar’s large value Summary: VYM makes a compelling case for the risk-adverse investor seeking long-term growth and income from a cohort high-quality dividend paying companies. VYM has an expense ratio of 0.10% and a dividend yield of greater than 3%, thus offering access to a high-quality ETF with a healthy rate of return and minimal risk at a very low cost. The mitigating risk aspect is exemplified during bear markets where VYM outperformed the S&P 500 4.9% and 8.4%, respectively in 2008 and 2014. VYM provides a compelling investment opportunity for investors seeking diversity across the large-cap space while mitigating risk and attaining a high yield and overall equity appreciation. Disclosure: The author currently holds shares of CVS (NYSE: CVS ), UnitedHealth (NYSE: UNH ), Target (NYSE: TGT ), Nike (NYSE: NKE ), Home Depot (NYSE: HD ) and Wells Fargo and is long all of these holdings. The author has no business relationship with any companies mentioned in this article. I am not a professional financial advisor or tax professional. I wrote this article myself and it reflects my own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. I am an individual investor who analyzes investment strategies and disseminates my analyses. I encourage all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, I value all responses. Disclosure: I am/we are long CVS, UNH, NKE, TGT, WFC, HD. (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.
3 Large Cap Value ETFs For Every Kind Of Investor
Large Cap Value ETFs offer great balance to go-go growth stocks. Patience is rewarded with value stocks. The market often beats down great companies to levels below intrinsic value. Most Large cap value ETFs offer familiar names trading at discounts. I am a value investor, meaning I look for stocks that the market hasn’t discovered yet or that are out of favor for some reason. The large-cap sector can provide outsized returns with reduced risk, by not buying stocks that are even close to being fairly valued. These value stocks require patience that is often rewarded, and comes without the handwringing that goes along with growth stocks. I’ve been hunting down 3 large-cap ETFs to share with aggressive investors, conservative investors, and the average investor. Why own a large-cap ETF? As mentioned, value stocks give you a hedge against taking on too much risk, and they are necessary to offset the increased risk that comes with investing in small-cap stocks that offer higher rewards but higher risk. Also you must have diversification in your portfolio. Sector outperformance occurs all the time, and the more diversification you have, the better. If you don’t have diversification, then you risk seeing your overall portfolio fall more in bad times by having your money overly concentrated. For conservative investors, have a look at the Vanguard Value ETF (NYSEARCA: VTV ). One of the cheapest ETFs in the category, it carries an expense ratio of 0.09%. Vanguard asserts that similar funds have a 1.11% expense ratio. That expense ratio is easily covered by its 2.52% yield, so you get a little spending money along with this ETF. With 318 holdings and a median market cap of $85.5 billion, you are getting the top-of-the-line companies in this ETF. The top 10 holdings only account for 25.8% of the total asset base, and they are safe and reliable investments with all the premier names you recognize. The sector diversity of the Vanguard Value ETF is impressive. It has 22% of assets invested in financials, 18% in consumer goods and services, 15% in health care, 11% in industrials, 10% in technology and 10% in energy. The rest is divided between basic materials, telecom and utilities. What I really like here is the fund has a beta of 0.98, meaning is to 2% less volatile than the broad market. However, with a Sharpe Ratio of 1.85, it has significantly enhanced risk-adjusted return compared to a risk-free investment. Here we find the kind of famous names you’d expect: ExxonMobil (NYSE: XOM ) , Microsoft (NASDAQ: MSFT ) , Johnson & Johnson (NYSE: JNJ ) , Berkshire Hathaway ( BRK ) , and Wells Fargo (NYSE: WFC ). This is a buy-and-hold fund, with only 5.5% of stocks turned over in the past year. That’s as it should be. The point is that value stocks require patience, not switching in and out of stocks. Its average price-earnings ratio is 17.9. It has a 96% total return over the past ten years. Aggressive investors should have a look at the First Trust Large Cap Value AlphaDEX ETF (NYSEARCA: FTA ) . It has 204 holdings, so it isn’t highly concentrated and therefore too risky, but it isn’t spread too thin, either. The top 10 stocks only make up 10% of the asset base, so you don’t have too much concentration risk, either. That’s why I like it – its more aggressive approach is tempered by these moves.. The expense ratio is a bit high at 0.64%, but still 47 bps below the average fund, if Vanguard is to be believed. Since inception, it has only returned 30%. However, coming off the low of the financial crisis, it is up almost 260%. The top holdings are from several different sectors. They include Tesoro (NYSE: TSO ), Edison International (NYSE: EIX ), PPL Corp. (NYSE: PPL ) and Traveler’s Companies (NYSE: TRV ). The fund has concentrated itself into six sectors: 18.5% utilities, 16% energy, 15% financials, 5% consumer discretionary, 14% industrials, and 11% IT. It carries a 3-year beta of 1.05, meaning it is only 5% more volatile than the market and comes with a Sharpe Ratio of 1.51 – meaning enhanced risk-adjusted returns compared to risk-free investments. A solid large-cap value ETF choice for the general investor is the Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) . At 199 holdings, it’s a bit too concentrated that I would like, but that’s still a lot of stocks to give you diversification that you need. The top 10 stocks account for 19% of the asset base. Its expense ratio is only 0.35%. Looking at risk, its 3-year beta is 1.2, meaning it has 20% more volatility than the broad market. However, the reason I like it for average investors is that the additional volatility comes with a Sharpe Ratio of 1.92 – meaning it has an excellent risk-adjusted return. Diversification is pretty good, with 25% energy, 33% allocationin financials, 4% health care, 4% technology, 5% industrial and 16% consumer holdings. Top names include Assurant (NYSE: AIZ ), Velaro (NYSE: VLO ), Gamestop (NYSE: GME ) , and Phillips 66 (NYSE: PSX ). As with any article regarding investments, you should never rely on information you read without doing your own due diligence. My articles contain my honest, forthright and carefully considered personal opinion, and conclusions, containing information derived from my own research. This may include discussions with management. I do not repeat “talking points” but may quote management from an interview. I am never influenced by third parties in arriving at my conclusions. Do not solely rely on my articles or anyone else’s when making an investment decision. Always contact your financial advisor before investing in any security. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (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.