DIV: Rich Yield, Yet Lackluster Total Returns - Not Worth Buying

seekingalpha2023-11-27

Global X SuperDividend U.S. ETF offers a substantial dividend yield of 7.5% and a value tilt.The problem here is that its interpretation of value/low-volatility factors delivered sluggish returns and,...

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Overall, it is a pass.johnrandallalves/iStock via Getty Images It has been more than two and a half years since I covered the Global X SuperDividend U.S. ETF (NYSEARCA:DIV). In the previous article, I called DIV \"a poor combination of value and low-volatility strategies,\" and its performance has been a vivid illustration of that point. Even though it did deliver a much lower decline in 2022 compared to the iShares Core S&P 500 ETF (IVV), 4.45% vs. 18.16%, it has massively underperformed the S&P 500 since March 31, 2021, nonetheless. Seeking Alpha And I still believe this 7%-yielding ETF is a pass. The reasons are detailed below. Let pessimists express their concerns DIV's investment strategy is based on high-dividend (one of the interpretations of the value factor) and low-volatility factors. The Indxx SuperDividend U.S. Low Volatility Index lies at the crux of it. According to the methodology summary, it is an equally weighted index: designed to track the performance of securities of companies in the United States that have a high dividend yield and low beta. To qualify, a U.S. company must have a \"beta lower than or equal to 0.85, with respect to the local country benchmark\" and a twelve-month dividend yield above 1% but below 20%. It must also have \"consistent dividend payments in the last two years\" and demonstrate a \"current year dividend greater or equal to 50% of the previous year.\" There are market cap and liquidity requirements. MLPs and REITs are welcome, along with common stocks. The goal is to pick 50 companies with the highest yields. They are assigned equal weights; there are a few caps discussed in the methodology. The index is reconstituted in February; however, it also undergoes quarterly reviews \"wherein index components are screened for dividend cuts and an overall negative outlook concerning the companies' dividend policy\" in May, August, and November. At first glance, DIV has a sound strategy that should be capable of not only delivering a solid yield but also more than healthy returns, with drawdowns that would not be that steep compared to the market. It is partly true, but only over a few short periods, i.e., 2022. The long-term returns are drab, to say the least. This is the first issue pessimists would highlight. Lackluster past performance For investors who bought into the ETF ten years ago, the vehicle delivered just around a 22.6% total return. And this is not an annualized figure. Regarding price return, DIV was even less successful, delivering a startling loss of about 37%. IVV advanced by 214% over the period. To provide even more context, DIV is in the group of five weakest dividend funds among those I cover on Seeking Alpha. Its price return was the third weakest in the cohort.        ETF 10Y Total Return   Global X SuperDividend ETF (SDIV) -29.67%   iShares Emerging Markets Dividend ETF (DVYE) -6.85%   First Trust S&P International Dividend Aristocrats ETF (FID) 8.24%   SPDR S&P International Dividend ETF (DWX) 15.04%   Global X SuperDividend U.S. ETF 22.56%   Click to enlarge Data from Seeking Alpha Only its sibling fund focused on high-yield international names (including the U.S., developed, and emerging markets), an emerging-market fund, and two international dividend ETFs did worse. So the fact is, DIV's massive yield was unable to significantly compensate for the lackluster price performance of its underlying holdings. Data by YCharts Do low-volatility, high-dividend (or value) strategies always deliver dismal returns? They tend to underperform the market over longer periods, yet there are ETFs with similar strategies that still did better than DIV in the past. And at the same time, there are funds that did even worse. The first example is the Franklin U.S. Low Volatility High Dividend Index ETF (LVHD), which was incepted in December 2015. Over the January 2016-October 2023 period, it managed to not only beat DIV but also deliver a lower standard deviation and a less steep maximum drawdown. Both funds underperformed IVV.    Portfolio LVHD DIV IVV   Initial Balance $10,000 $10,000 $10,000   Final Balance $17,101 $10,985 $23,631   CAGR 7.09% 1.21% 11.60%   Stdev 14.14% 19.97% 15.91%   Best Year 26.89% 30.66% 31.25%   Worst Year -11.00% -23.42% -18.16%   Max. Drawdown -24.32% -45.36% -23.93%   Sharpe Ratio 0.45 0.1 0.68   Sortino Ratio 0.65 0.12 1.02   Market Correlation 0.85 0.79 1   Click to enlarge Data from Portfolio Visualizer And the second one is the Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD), incepted in December 2016. The period was thus shortened to January 2017-October 2023.    Portfolio LVHD DIV IVV XSHD   Initial Balance $10,000 $10,000 $10,000 $10,000   Final Balance $14,507 $9,929 $21,070 $7,750   CAGR 5.60% -0.10% 11.52% -3.66%   Stdev 14.71% 21.13% 16.62% 23.43%   Best Year 26.89% 30.66% 31.25% 18.32%   Worst Year -11.00% -23.42% -18.16% -19.48%   Max. Drawdown -24.32% -45.36% -23.93% -41.76%   Sharpe Ratio 0.33 0.04 0.64 -0.11   Sortino Ratio 0.46 0.04 0.96 -0.14   Market Correlation 0.86 0.79 1 0.82   Click to enlarge Data from Portfolio Visualizer XSHD not only failed to eke out a total return stronger than IVV's but also underperformed DIV and LVHD. Ultimately, below is the comparison of DIV's annualized total returns since its inception (except for a few weeks in March 2013) to the Schwab U.S. Dividend Equity ETF (SCHD), WisdomTree U.S. High Dividend Fund ETF (DHS), and IVV.    Portfolio DIV DHS IVV SCHD   Initial Balance $10,000 $10,000 $10,000 $10,000   Final Balance $12,230 $21,335 $32,559 $29,665   CAGR 1.92% 7.42% 11.80% 10.82%   Stdev 17.91% 13.97% 14.72% 14.26%   Best Year 30.66% 23.03% 31.25% 29.87%   Worst Year -23.42% -9.80% -18.16% -7.47%   Max. Drawdown -45.36% -25.89% -23.93% -21.54%   Sharpe Ratio 0.14 0.5 0.76 0.71   Sortino Ratio 0.18 0.75 1.17 1.15   Market Correlation 0.77 0.84 1 0.91   Click to enlarge Data from Portfolio Visualizer DIV performed drearily, lagging all the ETFs selected and, surprisingly, demonstrating the highest standard deviation despite a low-volatility ingredient of its strategy. Growth, quality exposures: a lot to be desired Another problem with the current version of DIV's portfolio is its exposure to growth and quality factors. As of November 24, DIV had a portfolio of 47 holdings, with the top ten having only 26.5% weight. My calculations show that its weighted-average market cap stands at $30.8 billion, indicating its performance is influenced predominantly by large caps. For such a portfolio, I expected an adequate level of quality. Nevertheless, what I found inside is that only ~56% of the holdings have had a B- Quant Profitability rating or better, while almost 11% were D-rated (including D+ and D-). This is a poor result for a large-cap fund, to say the least. Next, its Return on Equity stands at about 17%, again, as per my computations. This might look almost acceptable (to be clear, 20% is a level I consider healthy), but the issue here is that contributions from debt-heavy names like Western Union (WU) and CrossAmerica Partners LP (CAPL) make it less reliable. Meanwhile, Return on Assets is just 5.8%, an obviously drab result. Next is the growth factor. DIV can boast neither solid forward earnings per share nor a strong revenue growth rate. While the first figure is meager at just 50 bps (mostly as pundits expect EPS contraction for 36% of the holdings), revenue growth is just average at around 6.2%. Regarding dividend growth stories, DIV does not offer much again. I found out that the weighted-average 3-year CAGR is at 2.4%, as 17% of the companies in this portfolio have a negative 3-year CAGR, which might imply they were unable to adapt to a high-inflation environment. While a 5-year rate is just marginally better at 3.4%, it is worth understanding that it is driven mostly by one stock, Pioneer Natural Resources (PXD), an oil & gas industry player, which has an 88% rate. With its contribution removed, the CAGR drops to 1.4%. What optimists can riposte There are not many positives. First and foremost, DIV does offer an alluring dividend yield of 7.5%, with the weighted-average yield of the portfolio at 7.2%, supported predominantly by such names with double-digit DYs as Global Net Lease (GNL), AGNC Investment (AGNC), and PetMed Express (PETS). Seeking Alpha But as I said above, it is backed neither by quality nor growth. Moreover, there are a lot of value stories under the hood, as 63% of the holdings have a B- Quant Valuation rating or higher; this is one of the highest results among the ETFs I cover. The earnings yield is also certainly alluring, at 7.3%, partly thanks to the contribution from Chesapeake Energy (CHK). Nevertheless, as the quality ingredient is missing, this alone cannot be used as a basis for a Buy thesis. Next, DIV's portfolio does deliver on the low-volatility front, as my calculations show its weighted-average 24-month beta at 0.72 and 60-month beta at 0.89. Investor takeaway  In sum, there is no doubt that DIV offers a substantial dividend yield and a value tilt. The problem here is that its interpretation of value/low-volatility factors delivered sluggish returns and, surprisingly, a high standard deviation, along with steep drawdowns in the past. Besides, DIV comes with a 45 bps expense ratio, which looks elevated assuming its sluggish past performance. 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