Low Vol & Dividends Disrupted

These two steady and reliable investment factors have been tossed on their heads.

Reviewed by: Drew Voros
Edited by: Drew Voros

[If you are interested in learning about low volatility and dividends, join us for our free webinar, “Are Markets Different This Time?” on Wednesday, May 20 at 2 p.m. ET. You can register here.]

For years and years, the U.S. stock market sailed upon placid water when it came to volatility, which seemed to be nearly nonexistent, an ideal condition for most investors riding markets to record after record high.

At the same time, dividends kept being churned out at a steady and reliable pace by all the biggest companies in the country, the likes of Apple, Boeing, Disney and Shell, providing income on top of surging stock prices.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

These two market elements—low volatility and steady dividends—appeared to be the kinds that would seeming go on indefinitely. And then suddenly March market madness struck and these two safe and even boring factors were thrown on their heads.

Volatility Erupts

For the better part of a decade, as markets rose up the ladder to new all-time highs, year after year, volatility was nowhere to be found. As an example, 2017 was arguably the least volatile year on record, and certainly the calmest in the last 50 years. And while some instances of volatility raised their heads from time to time, the smooth sailing continued.

Then the coronavirus struck the market in March with thunder and lightning, igniting a month of volatility that has never been seen before.

The month of March, based on daily price volatility, was the most volatile month on record, even topping 1929’s stock market crash months. Multiple trading halts and plummeting stocks ensued in a fast and furious manner. Entire industries were shutting down as the country’s economy and personal movements went on lockdown in an effort to combat the spreading virus.

While April did see a calming of the volatility waters, the idea of a happy-go-lucky stock market with few surprises has been washed away. The markets have recovered but are on edge, waiting for the next wave of virus cases or something else unforeseen.

Dividends Dented

Dividends followed a similar course. Everything was going smoothly; earnings were strong and producing sustained and high dividends fairly carefree. Stock prices kept hitting new all-time highs, so investors were getting income and price appreciation.

Easy street until, again, March market madness shook the dividend space as quickly and violently as it did volatility.

Since March, we have seen at least 30 major companies cut or suspend dividend payouts in an effort to stem losses tied to the coronavirus. Among those companies, Boeing, Disney and Shell joined the crowd. Shell hadn’t cut or suspended its dividend since World War II.

On the other hand, many companies, such as Apple, raised their dividends despite everything that has happened, proving that all companies are not faring the same. 

Picking winners and avoiding losers in the dividend space is a loser’s game, as is trying to time volatility. This is where ETFs can help.

Low Vol, High Dividend ETFs

There are ETFs that offer a combination of low volatility and high dividend stocks using a rules-based indexing approach.

Two such funds are the Legg Mason Low Volatility High Dividend ETF (LVHD), a $670 million fund that charges an expense ratio of 0.27%, and the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD), with $2.5 billion in assets under management and an expense ratio of 0.30%.

LVHD tracks an index of roughly 50-100 U.S. stocks selected from across the market cap spectrum. Stocks are selected and weighted to emphasize profitability, high dividends, low price volatility and low earnings volatility. Specifically, LVHD considers the volatility of prices and earnings in addition to yield and positive earnings. 

Meanwhile, SPHD tracks a dividend-yield-weighted index comprising the 50 least volatile names chosen from a shortlist of the S&P 500's 75 highest-dividend-yielding securities. By choosing the 50 least volatile, highest-yielding S&P 500 stocks, it hardly looks like the broad large cap market.

The idea of an investment with low volatility that offers steady and high dividends is an attractive concept to investors. In some of the choppiest waters we’ve ever seen, old winning strategies may not be the future winners, but ETFs can help navigate troubled waters.

(If you are interested in learning more about low volatility and dividends, join us for our free webinar, “Are Market Different This Time?” on Wednesday, May 20 at 2 p.m. ET. You can register here.)

Drew Voros can be reached at [email protected]

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.