DIV: Yield And Valuation Look Great, But Not Quality And Return (NYSEARCA:DIV)

This dividend ETF article series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. As holdings and their weights change over time, I may update reviews when necessary.

DIV strategy and portfolio

The Global X Super Dividend U.S. ETF (NYSEARCA:DIV) has been tracking the SuperDividend U.S. Low Volatility Index since 03/11/2013. It has 51 holdings, a distribution yield of 5.76% and a total expense ratio of 0.45%.

As described on Global X website, eligible companies must meet conditions of minimum market capitalization, trading volume, free float, be domiciled and listed in the U.S., have a beta below 0.85, a dividend yield between 1% and 20%, have paid dividends for the last 2 years and the dividend should not have been cut by more than 50% since last year. The index selects in equal weight the 50 companies meeting these conditions which have the highest dividend yields, with a limit of 12 constituents and 25% of asset value in any sector, and 10 constituents and 20% in MLPs. The index is reconstituted once a year in February, but companies may be replaced between reconstitutions in case of dividend cut or negative outlook.

The fund invests mostly in U.S. companies (97.8% of asset value). It covers all size segments, with a focus on small and micro-caps (59.7% of asset value is in these two categories).

The top four sectors are energy (18.5%), utilities (17.1%), consumer staples (15.3%) and financials (15.2%). Other sectors are below 9%. Compared with the S&P 500 (SPY), the fund overweights these top four sectors and also real estate. It underweights technology, communication and consumer discretionary.

The top 10 holdings, listed in the next table with some fundamental ratios, represent 23% of asset value. The largest holding weighs about 2.5%, so risks related to individual stocks are low.

Historical performance

Since inception (03/11/2013), DIV has lost about 18% in share price:

The total return is positive (including dividends and reinvesting them), but it has underperformed SPY by 9 percentage points in annualized return (see next table). Moreover, DIV has a much higher risk measured in drawdown and volatility (standard deviation of monthly returns).

Data calculated with Portfolio123

This table also shows DIV has underperformed popular dividend-oriented ETFs with lower yields: the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation Index Fund (VIG).

The next chart plots the equity value of $100 invested in DIV and SPY since DIV’s inception, with all dividends reinvested.

Comparing DIV with a reference strategy

In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets, Piotroski F-score, Altman Z-score, Payout Ratio.

The next table compares DIV since inception with a subset of the S&P 500: stocks with an above-average dividend yield, an above-average ROA, a good Altman Z-score, a good Piotroski F-score and a sustainable payout ratio. The subset is rebalanced quarterly to make it comparable to a passive index.

Past performance is not a guarantee of future returns. Data Source: Portfolio123

DIV underperforms this dividend quality benchmark by a wide margin. However, ETF performance is real and the subset is hypothetical. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).

Scanning the current portfolio

DIV has 50 holdings in a portfolio constituted in February. It is significantly cheaper than the S&P 500 regarding the usual valuation ratios, as reported in the next table.

I have scanned DIV holdings with the quality metrics described in the previous paragraph. I consider that risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are less relevant. With these assumptions, 13 stocks out of 50 are risky and they weigh 25.5% of asset value, which is a bad point.

Based on my calculation, aggregate Altman Z-score, Piotroski F-score and return on assets are significantly below SPY’s aggregate values. These metrics point to a portfolio quality inferior to the benchmark.

Takeaway

DIV follows a high-yield strategy with 50 stocks in equal weight and an annual reconstitution. Its heaviest sectors are energy and utilities. Despite its low-volatility rule, it is a high-risk product: drawdowns and volatility are much worse than the benchmark. It is also risky from a fundamental point of view: valuation looks attractive, but quality metrics are significantly inferior to the benchmark. DIV is a typical example of the drawbacks of high-yield investments: a history of decreasing and volatile share prices, a low quality of assets. Finally, it is difficult to justify a 0.45% expense ratio for a strategy that is quite simple and has an underwhelming track record. For transparency, my equity investments are split between a passive ETF allocation (DIV is not part of it) and an actively managed stock portfolio, whose positions and trades are disclosed in Quantitative Risk & Value.