Choose HDV ETF To Ride Out A Possible Recession

Investing in iShares Core High Dividend ETF (NYSEARCA:HDV) can be a great way to build wealth with dividends and increase your financial security with low volatility investments. This is especially true for investors that may be concerned about a possible recession and continuation or deepening of the current bear market. Economists and strategists are expecting slow growth in 2023. JPMorgan just recently forecast just 1% GDP growth next year. Others are forecasting a recession.

The Vanguard Group, one of the largest money managers in the history of the world, believes there is a 90% chance of recession in 2023. Fortunately, they have actually raised their long-run expectation of equity returns to 7.2% to 9.2% annualized for the next ten years.

Howard Marks, leader of the $163 billion Oaktree Capital, recently put out a memo called “Sea Change.” Marks is well known for his mastery of market cycles and his ability to profit from them. He notes that inflation and interest rates will dominate the investment landscape for the next few years. Gone are the days of equities with no earnings or cash flow dominating markets, driven higher by investors, buying due to fear or missing out. Marks generally asserts that we are returning to a period of “free markets” which won’t be driven by stimulative FOMC actions, but rather by expected returns and valuation.

He adds,

A recession in the next 12-18 months appears to be a foregone conclusion among economists and investors.”

and

That recession is likely to coincide with deterioration of corporate earnings and investor psychology.“

Marks is known to advocate that these cycles become like self-fulfilling prophecies, driven by changing psychology among investors and economic participants.

Where to invest?

The iShares Core High Dividend ETF may be an optimum investment vehicle for a slow growth period with some equity market volatility. This ETF has the added benefit of targeting high dividend paying stocks and it is composed of the 75 highest-yielding stocks within the S&P 500, which is an index made up of the largest U.S. companies. This ETF enables investors to diversify their holdings across a range of companies and sectors without having to purchase multiple equities.

One of the biggest benefits of investing in HDV is the potential for higher yields compared to other similar equity investments. The average dividend yield for the ETF is currently 3.58%, which is significantly higher than the S&P 500 average of 1.64%. It’s also comparable to the yield on a ten-year Treasury at 3.67%, but with the added benefit of potential increases in the underlying equity values. This means that investors in HDV can potentially earn better overall returns from their investments due to the higher dividend payments.

Another advantage of the iShares Core High Dividend ETF is its low cost. This ETF carries an expense ratio of 0.08%, which is much lower than the average expense ratio for actively managed mutual funds. This is also lower than the expense ratios of several peer funds. The First Trust Rising Dividend Achievers ETF (RDVY), WisdomTree LargeCap Dividend ETF (DLN), and First Trust Morningstar Dividend Leaders Index ETF (FDL) are all examples of large dividend strategy ETFs with expense ratios that are multiples higher than HDV. This low expense ratio enables investors to keep more of their returns instead of having to pay high management fees for nearly the same investment.

As can be seen below, HDV has had superior returns to those names over the past year. A similar comparison can be done amongst many of the other options in this category.

In addition to the higher yields and low cost, the iShares Core High Dividend ETF also offers greater tax efficiency than buying individual equities. Since the ETF is composed of dividend-paying stocks, the dividends are generally subject to a lower tax rate than income from other sources (such as real estate). This can result in greater after-tax returns for investors who hold this ETF in a taxable account.

Holding an ETF like this as a long-term investment also reduces the need to sell and incur capital gains taxes. That’s another long-run tax savings.

Recession-Proof Investing

Dividend paying stocks are a great way to lower your overall risk during a recession. These stocks pay out a portion of their profits to shareholders in the form of dividends making the equities less volatile and less affected by market corrections. These stocks might provide a steady income stream regardless of the market environment. This can be a great way to reduce market risk since the income from the dividends can also offset any losses from a downturn in the stock market.

If an investor is worried about the direction of the market, they have some options when it comes to reinvesting cash. For instance, they may choose to raise cash and let it pool up for a future market opportunity. If the investor believes stocks are undervalued, they can simply reinvest dividends immediately.

Sector Diversification

As mentioned earlier, the ETF is composed of the 75 highest-yielding stocks within the S&P 500, which provides investors with exposure to a wide range of companies and industries. This diversification can help reduce risk and potentially increase returns by spreading out investments across different sectors. About one quarter of this ETF’s sector exposure is within the Energy Sector.

Warren Buffett, the legendary and sage investor and head of Berkshire Hathaway, has a long history of investing in energy stocks and for good reason. His success in the energy sector has helped to make him one of the most successful investors of all time. Some of Buffett‘s strategy has been to purchase energy stocks that have strong fundamentals, such as energy companies with strong cash flows and good profit margins.

Energy stocks fit into a category of equities that Buffett prizes for dependability. The consistency of their cash flow makes them easier to value and you can expect that dividends may grow over time, due to economic growth and demand expansion.

This year, Buffett has placed big bets on Chevron (CVX) and Occidental (OXY), which he sees as undervalued. He ended 2021 with about $150 billion in cash and has managed to deploy about $30 billion this year on these energy giants, reaping a large return.

Other sectors within this ETF also fit into that value-oriented investing strategy, such as financials, consumer staples, healthcare, and utilities. Almost 75% of the sectors in this ETF are strong sectors with stable demand and consistent dividends.

Summary

Overall, investing in iShares Core High Dividend ETF can be a great way to build wealth and increase financial security, especially during periods of market weakness. With a recession looming, this ETF makes a great option. The ETF also offers investors the potential for higher dividend yields and tax efficiency, as well as the diversification benefits of investing in a broad range of equities.