High Dividends: How To Limit The Risks

Seeking AlphaDividend StrategyHigh Dividends: How To Limit The RisksOct. 5, 2020 4:19 PM ET|| Includes: AMLP, DVY, IWV, REM, SCHD, SDY, SPY, SPYD, VYMby: Fred PiardFred Piard Quantitative Risk & ValueExclusive market risk indicator paired with hedging and ETF strategies.SummaryHigh dividends come with high risks, especially in 2020.
A measure of volatility, drawdown and price decay in high-dividend stocks.
A factor to cut the risks and improve the expected return.
High yields, high risks
High yields often come with high risks of volatility and capital decay. In 2020, income seeking investors with heavy positions in mortgage REITs and MLPs have been badly hit. I sincerely feel for them. The S&P 500 has recovered from the March meltdown, but the iShares Mortgage Real Estate Capped ETF (REM) is still 45% below its 52-week high, and the ALPS Alerian MLP ETF (AMLP) is 55% below it. All high-dividend equity ETFs (VYM, SDY, SCHD, DVY, SPYD, etc.) have lagged the benchmark (SPY) in total return not only in 2020, but for years.
This article measures the risks on high-dividend stocks (volatility, drawdown and price decay), then suggests a solution to limit them.
Measuring the volatility and capital decay of high-dividend stocks
The next table shows the simulation result of a screen holding Russell 3000 stocks with a dividend yield above 6.3%, rebalanced every quarter since 1999 (without trading costs). The benchmark is the iShares Russell 3000 ETF (IWV).

This hypothetical high-yield portfolio slightly lags the benchmark in annualized total return, but the difference is immaterial. What is materially higher is risk, measured in volatility (StdDev) and also in drawdown.
I have chosen a dividend threshold of 6.3% because it is the limit where the annualized return is still very close to the benchmark. Higher dividend thresholds result in simulations with lower returns. For example, with stocks yielding more than 8%, the annualized total... Read more