Another version, using SPHD
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data on the underlying index is available back to 1990. The S&P 500 Low Volatility High Dividend Index takes the 75 highest dividend-yielding stocks in the S&P 500, selecting the 50 stocks with the lowest realized volatility over the trailing year. The number of stocks from a given industry is capped at 10. The index constituents are weighted by dividend yield, and rebalancing is done bi-annually in January and July.
Using the full set of data from the index methodology dating back to 1990, the S&P High Dividend Low Volatility Index has strongly outperformed the S&P 500 with lower return volatility. As depicted below, the index has had an average return of 11.87%, besting the S&P 500 by 164 bps per year through yesterday's close.
 Source: Bloomberg
This absolute outperformance was achieved with 89% of the return volatility of the S&P 500 as measured by the annualized standard deviation of monthly returns. It makes sense then that we could swap out the riskier S&P 500 as well as a smattering of low-yielding bonds in exchange for this high-dividend/low-volatility fund and produce higher absolute and risk-adjusted returns.
In the table below, I compare the return profile of the S&P 500 ( SPY), a bond index ( AGG), the 60/40 combination of the two rebalanced annually, the High Dividend Low Volatility Index (denoted as LVHD), and a portfolio that is 80% LVHD and 20% Agg. Note that 60/40 produces a higher Sharpe ratio than equities or bonds alone, but that LVHD with and without a bond complement produces even higher risk-adjusted returns. The Low Volatility High Dividend strategy is riskier than the Low Volatility strategy depicted in the popular firstarticle in this mini-series. Even the 80/20 with LVHD is riskier than the traditional 60/40, but both LVHD and the 80/20 with LVHD deliver higher long-run returns than the balanced portfolio because Low Volatility High Dividend Stocks have outperformed historically.
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