Massaging Your Dividend Equity Buy List: Part 2

Includes: HDV, SPLV
by: Michael Fabian

It has been interesting evaluating the equity markets over the past several weeks. With each passing trading day it feels as if the running of the bulls is getting ever more bone-weary. I give a lot of latitude to the positive fundamental data that has kept the bears at bay, but as these mature data points fade in our minds, what are we left with to fuel additional upside momentum? I think that the successes we have seen in the first quarter go along way in ensuring the next correction will be shallow, but won't prohibit it's existence by any means. Even the short term technical picture is somewhat fragmented as the S&P 500 launched to new highs then was suddenly left out in the cold as more worries caused investors to push back from the table.

I am still patiently focused on my game plan of assembling a buy list for the purpose of adding dividend equity exposure back to my client's portfolios. Those who read my first summary article on creating a buy list, and then monitoring those opportunities, Massaging Your Dividend Equity Buy List, know that I've been continuing to pass the time by researching the best risk-to-reward entry points for the five ETFs I'd like to purchase. In this article I'd like to focus more specifically on two ETFs that I think complement each other well - the iShares High Dividend ETF (NYSEARCA:HDV) and the Powershares S&P Low Volatility ETF (NYSEARCA:SPLV). I think they strike together just the right balance of income exposure and diversification. in fact, between these two funds, I think an entire domestic equity portion of an income portfolio can be well represented. In pulling back the curtain and taking a closer look at the underlying holdings, I especially favor the fact that there is minimal crossover amongst the individual securities within these two funds. They roughly share a third of the same stocks within their repertoire. I'm not bothered by that in the least since they are concentrated in the higher yielding, more defensive areas of utilities and consumer staples. Conversely, The areas that vary more widely are financial, healthcare, and technology stocks.

Another key difference is the weighting methodology of each fund. The Powershares ETF strikes a more equal balance in the allocation of the 100 stocks it carries, and are primarily screened due to the merits of their low volatility. Whereas the iShares offering, which is based on a Morningstar index, is heavily weighted toward financial health, dividend yield and market capitalization. A primary example of these differences is apparent in the allocation to the high dividend telecom giant AT&T (NYSE:T), which makes up a 10.1% position in HDV vs. just a 0.964% position in SPLV. Other notable differences in the construction of these two funds is the way in which they choose to distribute income, SPLV pays monthly dividends, while HDV pays quarterly. Examining the chart, over the last nine months, the price action has been similar, but as I suspect over greater lengths of time the index construction differences will begin to diverge even further. I also believe the nature of the strategies will diverge once more in the midst of a correction in the equity markets.

As I've mentioned before, I think great opportunities will be offered to those with patience. Even a 4-6% correction in either of these funds would begin to present the type of risk-to-reward framework I look for to begin building starter positions. Since I would classify both these funds as core holdings, using a basic dollar-cost averaging approach to build into a full sized position makes a lot of sense. As with any equity holding, always use a stop loss based around a point you are comfortable with that also coincides with some layer of technical support.

For additional information on specific levels I believe make sense at this juncture, please read my other article entitled, The Actively Managed Income Conundrum.

Disclosure: I am long SPLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.