DHS - DHS: High Dividend Stocks Inexpensive Heading Into Year-End

2023-10-10 14:35:57 ET

Summary

• Dividends have underperformed other equity factors in 2023.
• WisdomTree U.S. High Dividend Fund is undervalued and investors should stick with income-focused strategies.
• DHS focuses on high-yield companies in the 2nd quartile, has a value-oriented portfolio, and shows potential for a rally in the second half of the year.

Dividends have been a lousy equity factor in 2023. Notice in the graph below from WisdomTree that the “high dividend” slice of the stock market is underperforming every other category popular with smart-beta investors. This year's gains have been focused within the growth style and among high-quality companies that have been able to weather a slew of macroeconomic crosscurrents and elevated volatility in the bond market.

I have a buy rating on the WisdomTree U.S. High Dividend Fund (DHS). I assert that its valuation is appealing today and that investors should stick with strategies focused on an income return despite the fund being out of relative favor for the last several years, with added negative alpha so far in 2023.

High Dividend Equities Have Been Rotten In 2023 So Far

For background and according to WisdomTree , DHS seeks to track the investment results of high-dividend-yielding companies in the US equity market. Investors can use the ETF to get targeted exposure to domestic stocks of high-yield companies. The fund can also be used to replace a large-cap value strategy to achieve demand for both growth potential and income returns.

DHS is a moderate-sized fund with more than $1.1 billion in assets under management, and its annual expense ratio is low to moderate at 0.38%. Its share price momentum is quite weak right now, and I will highlight how the ETF is testing key support later on in The Technical Take. DHS features an above-market 4.4% trailing 12-month dividend yield, while risk can be high at times with this play. Still, liquidity is robust given average daily volume of more than 60,000 shares and a 30-day median bid/ask spread of just five basis points.

It’s key to remember that owning dividend stocks has historically been a solid long-term strategy for both active and passive investors. According to WisdomTree, “Since 1957, dividends have grown by an average of 5.7% per year—more than 2% above the rate of inflation. That characteristic is why Professor Jeremy Siegel refers to stocks as “Super TIPS”— as equities can provide long-term inflation protection but with real growth as well.

Dividends Have Historically Buffered Inflation Risk

Dividends are also much less volatile than actual stock prices. In the last 64 years, dividends declined in just six years. By contrast, equity prices fell in 18 years. Moreover, dividends dropped by more than 5% just once since 1958, while the worst single year for the S&P 500 was down more than 40%. In short, stock prices are more volatile than cash flows paid to shareholders. Of course, it is always key to look at net returns on a total-return basis.

Very Few Instances of Dividend Declines In The SPX

DHS focuses on owning companies from what is called the “2nd quartile” of payers. That means, it’s the 61% to 80% of highest-yielding companies that are preferred since history suggests the best returns are found in that group. It is overly risky to hold only the very highest dividend stocks since that could be a sign of poor fundamentals and earnings, while firms not paying dividends at all also have higher volatility with lower returns.

2nd Quintile Of Dividend Payers Has Performed Best Since 1957

For DHS itself, the portfolio is very much value in nature. Just 1% of the allocation is considered “growth” on the style box, and nearly half the fund is “large-cap value.” It also deviates highly from the S&P 500 in that the fund’s biggest sector weight is Energy at more than 21% with Financials also being high at 18%. The growth areas of Information Technology, Communication Services, and Consumer Discretionary (more than 40% of the SPX) are just 16% of the fund.

On valuation, WisdomTree lists the forward price-to-earnings ratio at just 10.9, making it exceptionally cheap compared to the broader market.

DHS: Holdings, Sector, Country Breakdowns

According to data from Equity Clock , DHS tends to rally over the back half of the year. The early October through early January stretch, in particular, features solid strength, on average. So, this is a bullish data point to consider in the months ahead.

DHS: Bullish Seasonal Trends To Close Out The Year

The Technical Take

With a much different composition compared to the SPX, an inexpensive valuation, and a high yield, the chart suggests there’s key support in play. Notice in the graph below that the $75 to $77 range has been tested several times since Q3 2021. The fund has made a series of lower highs since the peak back in the second quarter of 2022 and the long-term 200-day moving average is falling, which suggests the bears are in control.

But also take a look at what happened on Columbus Day – there was a large volume spike as shares rallied more than 1.2% (off support). If the ETF can rise above the 200dma and the $83 to $84 area, that would likely portend an eventual retest of the prior range-highs between $89.50 and $92. Below $75, however, and a significant leg lower could commence.

DHS: Shares Holding Important Support, Big Volume Up Day

The Bottom Line

I have a buy rating on DHS. The cost is reasonable, and the fund employs an evidence-based approach to dividend investing.

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