by Andrew Zenonos
Global equities have started 2022 with a very different backdrop compared to previous few years, as the magnitude and speed of interest rate hikes is digested by markets.
We have seen volatility return and markets fall, with expensive stocks punished the most. As of 10 February, the ASX300 was down over 2% and the S&P500 down over 5% for the year to date1. As we move into a period of rising interest rates and excess liquidity being drained from markets, the level of uncertainty in markets will continue to rise – and this will lead to higher volatility in markets.
Whilst markets have appreciated in recent years, one of the strongest themes has been the outperformance of growth stocks and underperformance of value stocks, including dividends. So far in 2022, this theme has reversed and value stocks, including dividend stocks, have outperformed. In a market with increased uncertainty, and rising interest rates likely to take the ‘frothiness’ out of markets, investors need to prepare for the likelihood of lower returns from equity markets. As a result, dividend income as a proportion of total return, should be a major focus for investors. Russell Investments’ High Dividend Australian Shares ETF (RDV) is well positioned to take advantage of this market environment going forward.
Source: Bloomberg
RDV’s focus on stocks that pay higher dividends than average has been well rewarded through the beginning of 2022, as markets rotated away from growth and into value stocks. As of 10 February RDV was ahead of the ASX300 by ~3.4% . Rate sensitive stocks such as financials have outperformed through 2022, which has benefitted RDV. Financial stocks have historically been, and continue to be, relatively high dividend payers which investors rely on for income. Suncorp, Bendigo Bank, and Bank of Queensland have added value in the portfolio. All three stocks have either paid or are expected to pay, above market dividend yields and remain overweight positions in RDV.
Outside of financials, positions in more cyclical sectors have also added value throughout the year, benefitting from ongoing rotation. Aurizon Holdings and Worley have added value on the back of continued strength in the materials and energy sectors respective, and both stocks are expected to pay attractive income streams to investors – a double feature in the current market environment.
As with any portfolio, what is not held is just as important as what is held. RDV’s underweight to market heavyweight growth stock CSL has added value through 2022, as this stock has underperformed the broad market by over 10%1 alongside high-multiple growth globally.
The bottom line
As markets emerge from COVID-19 (again) and move back into the reopening phase, alongside a move higher in global interest rates, we expect to see further rotation within equities away from high growth stocks and towards value stocks. Therefore, expect the high dividend segment of the market to continue to do well – and RDV remains well positioned to capitalise on this theme in markets.
Explore the Russell Investments High Dividend Australian Shares ETF (RDV)
Source: Bloomberg
