One of the most popular strategies at our firm is the Strategic Income Portfolio, which focuses on a multi-asset approach to generate consistent income and overall low volatility. In order to accomplish those goals, we are continually scanning the ETF landscape to evaluate suitable equity income funds that meet our investment criteria. These ETFs typically consist of high quality stocks with above average dividend streams and low internal expenses.
While every index is slightly different, one theme that you often see repeated throughout the high dividend arena is an emphasis on big energy names. Exxon Mobil (XOM) and/or Chevron Corp (CVX) are commonly in the top 10 holdings of these diversified dividend portfolios. According to dividend.com, XOM has a current dividend yield of 3.74%, while CVX yields 5.00%.
As a result of the energy sector woes over the last 12-months, I thought it prudent to look at the overall impact of these stocks on total return. In addition, it should be noted that ETFs with a fundamental or dividend weighting methodology may be increasing their energy exposure in the future to adjust for the higher yields these companies are now paying.
One example of a fund with an outsized allocation to energy stocks is the iShares Core High Dividend ETF (HDV). This ETF is based on the Morningstar Dividend Yield Focus Index, which selects 75 stocks based on their high dividend yields and financial history. HDV currently has $4.3 billion in total assets, a 30-day SEC yield of 3.90%, and an expense ratio of 0.12%.
The top holding in HDV is XOM, which makes up 8.3% of the total portfolio. Energy stocks as a whole are the second largest sector in HDV with a total weight of 18.45%. Obviously this is going to result in these energy companies making a big impact on total return and overall yield.
On a year-to-date basis, HDV is down 1.50%, while the broad-based SPDR S&P 500 ETF (SPY) has gained 2.63%. This path of divergence really kicked into high gear over the last two months as the energy sector rolled over once again.
