By Philip van Doorn, MarketWatch
(This is the sixth article in a series about dividend stocks in today’s low interest-rate environment based on interviews with professional investors. Links to the previous articles are below.)
Investors who want to follow a dividend strategy but are worried about a decline in stock prices may be well-served by a low-volatility fund.
“Investors tend to panic when volatility rises,” said Mike LaBella, head of global equity strategy at QS Investors, which manages the Legg Mason Low Volatility High Dividend ETF /zigman2/quotes/205003646/composite LVHD -0.04% . “They tend to sell, which is the worst thing to do.”
The Legg Mason Low Volatility High Dividend ETF is appropriate for investors who are relatively conservative, LaBella said.
QS Investors is based in New York and has about $20 billion in assets under management.
The Legg Mason Low Volatility High Dividend ETF quotes a 30-day yield of 3.50%, and its portfolio yield, based on the past 12 months of quarterly dividends, has been 3.69%, according to Morningstar. The ETF pays out all the dividends it receives, and its yield typically ranges between 3.5% and 4%, LaBella said. (Please see funds with similar strategies in the tables, below.)
That is an attractive range when you consider 10-year U.S. Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.38% are yielding 1.62% and 30-year Treasury bonds /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.05% have a yield of only 2.10%.
The Legg Mason ETF is made up of 79 stocks screened from the Solactive U.S. Broad Market Index. The index includes about 3,000 stocks of U.S. and foreign companies that have primary listings in the U.S. or American depositary receipts (ADRs).
The QS Investors team screens the stocks to arrive at a list of 50 to 100 companies that have been consistently high dividend payers, while making sure the payouts don’t exceed earnings, or, in the case of real-estate investment trusts, cash flow. They look ahead, using consensus estimates, to try to screen out companies facing problems. The portfolio is rebalanced quarterly. Stocks with the highest scores take a 2.5% portfolio allocation, while the ETF limits exposure to a stock sector to 25% and limits the exposure to REITs to 15%.
“Just by looking at the first couple of screens, we might have very profitable companies with high dividends that are facing disruption,” LaBella said during an interview.
LaBella said an example of the results of the screening is General Electric /zigman2/quotes/208495069/composite GE -0.62% , which “pretty much cut its dividend out of nowhere, if you only looked at their balance sheet and historical earnings profile” in November 2017.
But in the months before the dividend cut, the ETF didn’t increase its holdings as it ordinarily would have when the stock price fell, because of the increased price and earnings volatility indicated by revisions to analysts’ estimates.
The ETF sold its shares of GE following the dividend cut, but LaBella said it saved “a significant amount of capital,” because it had not loaded up before the cut, and because it avoided continuing declines after selling the shares.
A one-year volatility review
The end of this month marks the one-year anniversary of the start of a brutal 19% decline for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.29% that ran through Dec. 24.