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ETF Specialist

High Dividends With Less Risk

This ETF targets high-dividend payers that have offered a fairly smooth ride.

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 PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD) targets high-dividend-yielding stocks in the S&P 500 but keeps risk in check by filtering out some of the riskier names from this group and capping exposure to individual stocks. This dual focus on yield and risk should help the fund continue to generate attractive performance relative to its peers over the long term. But large sector bets are still a source of risk.

The fund's benchmark screens for the 75 stocks with the highest-dividend yields in the S&P 500. It then removes the 25 stocks with the highest volatility over the prior year. This reduces its exposure to riskier stocks, which is important because narrowly focusing on dividend yield can court considerable risk. Many of the highest-yielding stocks have poor growth prospects and pay out a large share of their earnings as dividends, leaving a small buffer to cushion dividends if their earnings fall. Volatility isn't a perfect measure of risk, but less-volatile stocks tend to have more-stable cash flows than their more volatile counterparts and generally hold up better during market downturns.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.