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These are tough times for those looking for investment income. The interest rates have fallen recently and will likely remain low in the near future. Against this backdrop, high-quality dividend stocks can serve investors well. I believe investors should consider the little-known Fidelity High Dividend ETF (FDVV), which can give investors exposure to a number of great dividend stocks and an above-average dividend yield.
Image courtesy of Pixabay
Last month, the Federal Reserve kept interest rates flat at 2.25-2.5% and signaled that it won’t hike rates in 2019. Chairman Jerome Powell reiterated the central bank’s commitment of being “patient” at a time when the economy, though stable, is facing headwinds. The Fed’s move was widely expected. A number of major central banks around the world, such as the European Central Bank, have also turned dovish amid mounting concerns related to a global economic slowdown and uncertainties stemming from Brexit and the US-China trade war. I believe the fact that President Trump might consider capitalizing on challenging the Fed on any interest rate hike in the 2020 presidential elections also reduces the chances of a rate hike.
Image: Author. Source: U.S. Department of the Treasury. As on April 02, 2019.
The long-term rates have fallen considerably after Fed’s latest decision, with 30-year Treasury bond yields dropping from more than 3% a few weeks ago to 2.88% at the time of this writing. Moreover, the long-term yields on some bonds recently fell below the short-term yields (as shown in the image above), which indicates a partial inversion of the yield curve. This has further heightened investors’ fears, since an inversion can be interpreted as an early indicator of a recession.
In this environment, investors can earn superior returns by investing in high-quality dividend stocks. FDVV is a diversified fund through which investors can gain access to more than a hundred high-dividend paying companies, nearly all of which are US-based.
Image: Author
The fund was launched 2.5 years ago, which makes it a new entrant in this space. It has grown in size substantially in the recent past, with assets under management climbing from less than $100 million in early 2018 to $311 million currently. It is, however, considerably smaller than other well-established dividend funds, such as the iShares Select Dividend ETF (DVY), which has more than $17 billion of net assets.
FDVV tracks 121 high-dividend paying large- and mid-cap companies. The portfolio construction is fairly complex. The ETF tracks the Fidelity High Dividend Index, which uses Fidelity’s proprietary index methodology that is underpinned by five factors: market capitalization, high dividend yield, low payout ratio, high dividend growth, and the sector-wide dividend yield. International stocks may comprise up to 10% of the ETF. The result is that the FDVV’s portfolio gets heavily tilted towards large-cap companies that are expected to continue to pay and grow dividends.
The fund offers an above-average dividend yield of 4.11%. By comparison, a number of dividend ETFs, including some of the largest ones such as the SPDR S&P Dividend ETF (SDY) and DVY, as well as high-dividend focused funds such as the Vanguard High Dividend Yield ETF (VYM), which is also the largest dividend ETF in terms of AUM, and the iShares Core High Dividend ETF (HDV), all offer dividend yields of less than 3.5%. FDVV’s yield is also higher than what investors will get with some key dividend-paying sectors, such as REITs and utilities, where average yields are 3.67% and 3.39% respectively.
The fund’s above-average dividend yield is the result of its portfolio construction in which a high yield is a critical factor. This has allowed FDVV to consistently offer an above-average yield to investors. In fact, FDVV has been offering a higher dividend yield than all of the above-mentioned ETFs since its inception.
A higher yield, however, is often times associated with higher risk, but I believe that isn’t the case with FDVV. The fund mainly invests in well-established, large-cap companies that can withstand economic cycles. FDVV’s top 10 holdings consist of companies such as oil majors Exxon Mobil (XOM) and Chevron (CVX), which have been consistently paying dividends for decades, technology sector leaders Microsoft (MSFT) and Apple (AAPL), leading banks such as JPMorgan Chase (JPM) and Bank of America (BAC), and consumer goods behemoth Philip Morris International (PM) and PepsiCo (PEP). These are some of the best dividend stocks. Their shareholder payouts are backed by strong levels of free cash flows (operating cash flows in excess of capital expenditure) and are well-positioned to continue rewarding investors with dividends in the future.
Image: Fidelity
In addition to this, FDVV is highly diversified in terms of company-wide and industry-wide exposure. Its top holding, Exxon Mobil, represents just 2.99% of the fund’s assets, while the top 10 holdings account for just a quarter of the fund. Its top two sectors are financials (19.89%) and information technology (14.76%), which together constitute 34.65% of the ETF. That’s in contrast to concentrated ETFs which allocate around 10% or more assets to their top holding and typically have 50% exposure to one to two sectors. FDVV’s diversification minimizes the risks associated with owning an individual stock or being overweight towards a single sector. This could protect investors against a potential plunge in a single stock or a sell-off in a sector.
FDVV also comes with a reasonable net expense ratio of 0.29%. This means that the fund charges $29 each year on every $10,000 of investment. There are, however, other dividend ETFs which come with a much lower expense ratio. VYM, for instance, is one of the cheapest ETFs in the industry with an expense ratio of just 0.06%. On the other hand, some dividend ETFs charge a much higher fee. SDY, DVY, and the WBI Power FactorTM High Dividend Shares(WBIY) charge 0.35%, 0.39%, and 0.70% respectively. FDVV, therefore, is in the middle of the pack in terms of expense ratio, but I believe it makes up for it with an above-average yield.
FDVV has delivered a decent performance in the last 12 months, with shares rising by 7% in this period. The fund has outperformed some of its rivals such as VYM and DVY. With a high dividend yield, FDVV has delivered double-digit returns for its shareholders. I believe the fund will continue to do well in the future, driven in part by the strength of its portfolio. FDVV is also cheaper than a number of other dividend ETFs. It has a P/E ratio (trailing twelve months) of 15.6 times, which makes it cheaper than VYM, HDV, and SDY, which are all priced at more than 16.5 times earnings. I believe FDVV is a great dividend ETF which investors should consider buying.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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