The S&P 500 (SPY) had its worst month since March 2020, losing 8.5 percent, but other major indices had it worse. The Russell 2000 (IWM) was down 9.9 percent, while the Nasdaq 100 (QQQ) was down 13.6%.
The Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (VYM) were only down 4-5% as defensive issues - utilities, dividend payers, and low volatility stocks - outperformed the broader market. Consumer staples actually gained 2% in April.
As we see a little improvement in Q1 GDP growth and the Fed is anticipated to hike interest rates by 50 basis points in over a week and a half, I expect volatility to remain elevated. If Powell can deliver a balanced message and provide no surprises when he speaks, there is a possibility that stocks stage a relief rally.
Note: If you want to receive regular e-mail notifications when articles are published here, please drop your email in the box below!
My top dividend ETF picks for May show off that notion - maintain a defensive tilt but allow the opportunity to see some potential trend reversals. This doesnt look like the best time to be reaching for additional yield, but there are plenty of options out there that are balancing the pursuit of higher yields within a more targeted defensive strategy.
For the month of May, here are my top seven dividend ETF recommendations.
The United States'' Equity Income Increased (CVE) VictoryShares Shares Credit Suisse (CDC)
The CDC is one of the above strategies: it begins by identifying the 100 highest yielders from a series of the 500 largest stocks that have positive net earnings. Within that group, it ponders the components by the standard deviation of daily returns, or volatility, over the past 180 trading days. Lower volatilities get a higher weight.
However, the CDC adds an interesting twist that most ETFs fail. It may reduce equity exposure and raise cash. As stock prices decline further, it begins reintroducering stock exposure to the portfolio. Consider it as a built-in buy low strategy.
The strategy has worked very well. Morningstars has the highest 5-star rating and would be an ideal choice to navigate an environment that might show higher than average volatility. Its current yield is just under 3%.
FlexShares Quality Dividend Index ETF (QDF)
QDF has been popular for a while now because of its philosophy that focuses on profitability, management efficiency, and cash flows. Using these metrics, it assigns a dividend quality score to each stock and overweights those with higher scores. The final portfolio construction is optimized to highlight those names with the highest dividend quality scores while aiming to a market-like yield.
The quality emphasis is what I find most appealing here along with the quantitatively-driven approach to achieving it. At the moment, growth and non-profitable stocks are expected to continue, despite the fact that the economy is falling, and may be leaning towards quality dividends and balance sheets wise. QDF currently has a yield of 1.9 percent.
The Quality Dividend Growth ETF (DGRW) for WisdomTree in the United States
DGRW''s name may be a misnomer. Instead of looking at history of annual dividend growth as a selection criteria, it focuses on companies that demonstrate financial health to keep paying and increasing their dividends over time. DGRW does not necessarily target companies with multi-year dividend growth streaks, but maintains a large number of those names by default.
The reasoning behind purchasing DGRW is similar to that of QDF. When volatility is higher and the global economy''s macro outlook appears very uncertain, it is better to own stocks that are in the financial position to cope with harsher conditions. DGRW currently earns a dividend yield of 1.9 percent.
ETF for Trust Nasdaq Technology Dividend (TDIV) is the first trust trust index.
As the air has come out of the growth stock bubble, the tech sector has pretty consistently underperformed the larger market. Why recommend a tech dividend ETF then? I believe there is a case to be made for tech stocks returning in the near future. The core inflation figure has been somewhat down, and investors have speculated that inflation might peak. The new report will shed more light on whether or not core inflation is true. It might leave the market thinking that the worst is behind us and growth stocks are OK to reinflate. In that
TDIV does quite what it says: It focuses on dividend payers within the IT industry (after a few qualification screens) and ponders them according to dividend value. Because of this, it leans more heavily into the old school technology names, such as IBM, Oracle, Intel, and Texas Instruments. Its current yield is 2.1 percent.
Fidelity Dividend ETF For Rising Rates (FDRR)
Im not sure whether interest rates will make the long-term move higher than many anticipate, but it is evident that the trend is higher at least in the short-term. If thats the case, then having a company that focuses on stocks with a higher correlation to rising rates makes some sense.
FDRR has two expectations. It looks for companies that are expected to continue to pay and increase their dividends over time and with a positive correlation of returns to rising 10-year Treasury yields. This gives the portfolio a value tilt and overweights some of the more cyclically-sensitive areas of the market. FDRR currently offers a yield of 5.2 percent.
High Volatility ETF (SPHD) for Invesco S&P 500 High Volatility (S&P 500)
SPHD is another ETF that has been a long-time favorite of mine and is now being built in the same way as the CDC does. It starts with the S&P 500 and draws out the 75 names with the highest dividend yields over the past 12 months. Within that group, it identifies the 50 names with the lowest realized volatility in the last 12 months and dividend yield weighing them.
SPHD has been a feast or famine investment. It lands in either the top 5% of its peer group or the bottom 10% in any given calendar year with almost no in-between. Right now, it tends to be a bottom performer when growth/high beta stocks are in favor and a top performer when value/low volatility is in favor. I like that trend to continue. Its current yield is 3.6 percent.
WisdomTree Japan Hedged Equity ETF (DXJ)
Here''s the group''s wild card pick, which you should avoid considering if you have a good stomach. Japan is grappling with the recession, and the yen is falling as the Bank of Japan has instituted its yield curve control policy to prevent rates from rising.
DXJ''s case is a case for value markets that have outperformed growth in 2022, while Japanese equities are loaded with value opportunities. DXJ not only targets the highest quality dividend payers in Japan, but also protects against foreign exchange fluctuations. That means that Japanese equities are down about 16% year-to-date, but DXJ has actually increased 2%. It has now gotten a yield of 2.3%, which is a riskier proposition to be certain.
ETF Sector Breakdown
Let''s look at the markets and certain ETFs with that being said.
Right now, there are few, if any, pockets of strength. In this sense, consumer staples, energy, and materials are about the only areas of the market that we might claim are outperforming at the moment. Even utilities, which have had a fantastic run throughout 2022, is returning down to earth again.
Although the markets were falling this year, there were still areas working well and testing new 52-week highs. These times appear to be in the past as even key stakeholders, such as energy and utilities, are 7% below their recent highs. At this point, consumer staples, although the sector is doing its best, although even that doesnt appear particularly beneficial.
Im keeping an eye on the growth areas here. The communication services sector remained awful for me last week. Alphabet, which has consistently been a solid economy, has provided me with reason for concern. Consumer discretionary appears to be continuing to trend down as the economy and the consumer weaken. Tech has a few limitations, however.
While most companies are expected to be successful in these sectors, this is because telecom is not particularly oversold at the moment, although at least a half dozen subsectors are right on the edge of this distinction, even if they do not meet the textbook definition of having an RSI-30. Homebuilders had a nice week, although that looks more like a sell bounce than a signal of a trend reversal. I certainly wouldn''t want to be keeping homebuilders holding events as mortgage rates are rising
The net flows figures are interesting. Billions have been flowing out of the consumer discretionary and communication services sectors, but interest in IT stocks has been steady. ETFs in many sectors are still doing relatively well. Asset flows indicate that there is a level of support there.
Energy stocks may end the party, but the sector has been unchanged for the past month, and it appears that oil prices may finally settle down after weeks of rising higher. It''s probable that economies removing their dependence on Russian energy will prevent crude oil prices from falling too far, but it appears that the worst concerns have already been priced in.
Financials, particularly banks, still look weak here. The RSI for the broad sector slipped into oversold territory and, while there might be a chance for a quick recovery, Id be hesitant to commit too much here. Lending conditions were uneven even when the recovery was in full swing. I expect the big banks to look to alternative revenue streams to keep bottom line numbers up. However, regional banks might not have the same ability. Either way, worse lending conditions equal harder times for banks.
The only asset class with real strength in this market is the US dollar. Virtually every major global currency is in oversold territory right now, having dropped by 5% in the last three months against the greenback. The yen has dropped 12% in the last three months and there are no signs of abating as long as the Bank of Japan maintains its current policies.
Lumber prices have increased somewhat lately. Natural gas prices have remained elevated. This appears to be a broad market pullback. Stocks in Indonesia, Saudi Arabia, and Kuwait have done well in the last month, but the sentiment is negative almost anywhere you go.