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The PowerShares S&P 500 High Dividend Portfolio (NYSEARCA:SPHD) was launched in October 2012 as an exchange traded fund that seeks investment results that correspond to the S&P 500 Low Volatility High Dividend Index. Characteristics of this underlying index have led to long-run outperformance versus the S&P 500 (NYSEARCA:SPY). With lower volatility and nearly double the annual dividend yield of the broad market index, this fund could be an excellent vehicle for the income investing community on Seeking Alpha.

S&P 500 Low Volatility High Dividend Index

While there is a limited history with the SPHD ETF, data on the underlying index is available back to 1990. The S&P 500 Low Volatility High Dividend Index takes the seventy-five highest dividend yielding stocks in the S&P 500, selecting the fifty stocks with the lowest realized volatility over the trailing one year. The number of stocks from a given industry is capped at ten. The index constituents are weighted by dividend yield, and rebalancing is done biannually in January and July.

Since the advent of the index in 1990, the S&P High Dividend Low Volatility Index has strongly outperformed the S&P 500 with lower return volatility. The index has had an average return of 12.20%, besting the S&P 500 by 286 bps per year. This absolute outperformance was achieved with 89% of the return volatility of the S&P 500 as measured by the standard deviation of monthly returns. The returns discussed in this article are total returns including price appreciation and dividends, with dividends assumed to be re-invested into the respective index.

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Source: Bloomberg, Standard & Poor's

This outperformance has continued in 2013 with the S&P Low Volatility High Dividend Index producing 237 bps of absolute outperformance versus the S&P 500 through the close on Friday, May 17th.

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The Long-Run Benefit of Dividends

Long-time readers of my articles should not be surprised by this relative outperformance over both the long run or as witnessed in 2013. In a previous article, Dividend Aristocrat Investing 2013, I described the outperformance by constituents of the S&P 500 that had paid increasing levels of dividends over at least a twenty-five year period. I also suggested that this type of strategy would outperform in 2013 as investors moved out the risk curve from fixed income in search of yield. Dividends are an important part of market total returns, and steady dividend payers have outperformed the broader market over the trailing generation on both a risk-adjusted and absolute basis. Nine of the fifty constituents of the S&P 500 Low Volatility High Dividend Index are also amongst the fifty-four Dividend Aristocrats: Abbott Laboratories (NYSE:ABT), AT&T Inc. (NYSE:T), HCP Inc. (NYSE:HCP), Cincinnati Financial (NASDAQ:CINF), Kimberly-Clark (NYSE:KMB), Johnson & Johnson (NYSE:JNJ), Sysco (NYSE:SYY), Chevron (NYSE:CVX), and Nucor (NYSE:NUE).

Low Volatility Investing

Part of the long-run success of the Dividend Aristocrats is that companies that are able to continually increase returns to shareholders through the business cycle are typically stronger, less volatile companies than the market in general. This low volatility has historically been a key to market success. As I wrote yesterday, the S&P 500 Low Volatility Index (NYSEARCA:SPLV), which is the one hundred constituents of the S&P 500 with the lowest trailing one year volatility, has also markedly outperformed the S&P 500 over the trailing generation and has continued to outperform in 2013. The S&P Low Volatility High Dividend Index's inclusion of only the fifty least volatile stocks amongst the top seventy-five dividend payers helps this fund capture the Low Volatility Anomaly. Historical evidence suggests that the "Dividend Sweet Spot" is a yield between 3-6%, with higher yielding stocks producing lower long-run average returns. The exclusion of higher volatility dividend stocks, instead of a sole focus on the highest dividend payers, has helped the fund miss dividend cuts as constituents forced to trim their dividend typically have higher price volatility as the dividend becomes less certain, and are thusly excluded from the index.

Below is a list of the current constituents of the S&P Low Volatility High Dividend Index. I also included whether a given constituent was a member of the Dividend Aristocrats or the Low Volatility Index. Stocks in both indices have posted an equal-weighted return of 21% year-to-date.

With the indicated dividend yield on SPHD of 3.12%, nearly double the dividend yield of the S&P 500 of 1.66%, income investors can purchase this ETF, and expect to continue to have lower volatility than the broader market. While these dividend stocks have outperformed in 2013, this relative performance is likely not a temporal phenomenon given the long-run average outperformance of these companies versus the market at large. Dissenting opinions and discussion are welcome in the comments section. For more information on this fund, please see the linked materials below:

Fact sheet

Holdings

Source: A New Market Beating Dividend Fund