The Bottom Line
- Stock market volatility has been muted lately, but that can change quickly, with little warning.
- For investors who want to guard against a sudden downturn, the dilemma is how to do so without sacrificing near-term opportunity.
- Low-volatility strategies built around dividend stocks represent an intriguing solution—because they allow investors to participate in long-term market gains without necessarily penalizing performance.
- Consider the S&P 500 Low Volatility High Dividend Index—composed of the 50 least volatile high dividend stocks in the S&P 500. For the 10 years ending 8/31/17, it generated an average annual total return of 11.72—well above the 7.61% return for S&P 500 itself.1
- And with a trailing 12-month dividend yield of 4.07% for the S&P 500 Low Volatility High Dividend Index compared with just 1.98% for the S&P500, “a low-vol hi-div” approach could offer a measure of comfort for clients who want income but are concerned about volatility given current valuations and political/policy risks.
- Indeed, Legg Mason’s multi-asset manager QS Investors, which runs several strategies in this area, makes a compelling case that “low-vol/high div” deserves a dedicated allocation in a well-diversified portfolio—because it allows investors to stay ready for volatility, whenever it may come.
1 Source for all data is Bloomberg.