As the stock market is on the verge of a bear market that could last a few more quarters, exchange-traded funds like Amplify CWP Enhanced Dividend Income ETF (NYSEARCA:DIVO) could be a perfect choice for conservative and moderate investors. Due to its well-diversified portfolio and holdings in large-cap, dividend-paying companies, the ETF offers low downside risk during bear markets and healthy returns during uptrends. Both in terms of price and total return, DIVO has outperformed the broader market over the past twelve months. The dividend yield of over 5% appears sustainable as the underlying companies in its portfolio appear well positioned to weather challenging market conditions and slow-down economic growth.
How does DIVO offer low risk and high returns?
By taking low to moderate risks, conservative and moderate investors seek to construct a portfolio with the potential to generate sustainable long-term returns. Most of the time, they’re not chasing high-risk growth or cyclical stocks. Instead, they hunt bonds, government securities and stable companies paying dividends. I believe these investors can improve their portfolio stability and improve overall returns by adding high yield ETFs such as the Amplify CWP Enhanced Dividend Income ETF.
Recent data proves that DIVO is less risky in volatile markets and offers solid returns during uptrends. Over the past twelve months, the fund has generated a positive total return of 1%, compared to a negative return of 4.67% for the SPDR S&P 500 Trust ETF (SPY). A total return of 79% over the past five years also reflects its ability to become a good candidate for long-term investment.
To achieve high returns, the fund actively manages its portfolio and seeks to hold 20-25 positions in high-quality, dividend-oriented stocks. As of May 23, DIVO held a stake in 23 large-cap, dividend-paying stocks. The fund has spread investments across 10 S&P 500 sectors, with a focus on healthcare, consumer staples, energy and financials. Compared to growth and early-stage companies, most large-cap companies in these sectors are less sensitive to inflation, interest rate policy, growth expectations and geopolitical tensions.
Over the past twelve months, the majority of the fund’s equity holdings have outperformed the broader market and traded in the green. Seven of DIVO’s top ten stocks are trading in the green over the past twelve months. In addition to price returns, most of its top 10 holdings are among the top dividend producers. The majority of them have already increased their dividends for 2022 or plan to do so in the coming quarters. For example, UnitedHealth Group Inc. (UNH), DIVO’s largest equity portfolio, has increased its dividend by an average of 18% over the past five years. Likewise, Johnson & Johnson (JNJ), The Procter & Gamble Company (PG), Chevron (CVX), McDonald’s (MCD) and many others have a long history of dividend growth. The fund also had a large stake in tech growth stocks like Apple (AAPL) and Microsoft (MSFT). Although growth and tech stocks have been hit harder by economic contraction and interest rate policies, large caps seem less vulnerable to these headwinds. Indeed, large-cap growth stocks have billions of dollars of cash to invest in growth opportunities and to support investors’ returns. At the end of 2021, Apple and Microsoft were session on liquidity of $202.5 billion and $130 billion respectively.
Along with the top 10 picks, the fund’s other 13 holdings are also among the top dividend payers and belong to the large-cap market segment. For example, Merck & Co. (MRK), Aflac (AFL), Deere & Co. (DE), United Parcel Service, Inc. (UPS) and Verizon Communications (VZ) have a long history of returning significant money to investors. .
Is DIVO a good ETF for the bear market?
With the NASDAQ in a bear market and the S&P 500 poised to enter a bear market, it looks like the stock market will remain challenging for the next two quarters. The history of the S&P 500 suggests that it may take some time for the index to recover once it enters a bear market. For example, the last 20 bear markets have lasted an average of 1.4 years with a cumulative loss of 41%. Given this situation, it makes sense to seek out dividend-paying ETFs such as DIVO to reduce risk and generate cash returns.
Since DIVO’s portfolio is made up of dividend-paying stocks, I looked at the performance of these stocks in a volatile market environment. Dividend-producing stocks have also historically offered better returns and less volatility than other categories. Based on the chart above, stocks that steadily increase dividends have lower betas and outperform other stock classes. In contrast, non-dividend stocks underperformed in a volatile environment. From 2000 to 2018, dividend-paying stocks outperformed the S&P 500 by 12 times. In addition, dividend payers have outperformed the S&P 500 in every year of decline since 2000.
In addition to the historical performance of dividend-paying stocks, DIVO earned a buy rating with a quantitative score of 4.3 out of 5. An asset flow score of A indicates that investors trust the fund and are buying his actions. Similarly, a risk score of B+ suggests low risk. Strong investor confidence in its price-performance ratio is also reflected in its short interest rate of 0.05 compared to the median of all ETFs of 1.82%. Additionally, the fund’s A- score for dividends and B for momentum indicates that investors can expect potentially high returns from the fund.
The stock market has seen many crashes and bear markets, but it has always bounced back after each crash. Given the Fed’s monetary tightening and the slowing economy, the recent sell-off could persist over the next few quarters. In such an environment, it is prudent to add low-volatility ETFs to portfolios to increase portfolio stability. Divo’s portfolio management strategy, dividend yield above 5% and potential to generate high stock market returns make it a good choice for investors with low to moderate risk tolerance.