DVY: Gets The Job Done But Underperforms Peers

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iShares Select Dividend ETF underperforms similar dividend ETFs such as Fidelity's High Dividend ETF and Schwab's Dividend ETF.DVY lacks exposure to the technology sector, hindering its price growth ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nDVY: Gets The Job Done But Underperforms Peers\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-31 11:18 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4696635-dvy-gets-the-job-done-but-underperforms-peers><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>iShares Select Dividend ETF underperforms similar dividend ETFs such as Fidelity's High Dividend ETF and Schwab's Dividend ETF.DVY lacks exposure to the technology sector, hindering its price growth ...</p>\n\n<a href=\"https://seekingalpha.com/article/4696635-dvy-gets-the-job-done-but-underperforms-peers\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SCHD","symbol_name":"Schwab US Dividend Equity ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4696635-dvy-gets-the-job-done-but-underperforms-peers","article_id":"2439693117","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1126636461/image_1126636461.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2439693117","pubTimestamp":1717125510,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Unfortunately, DVY doesn't quite offer the highest of dividend yields as well. The current dividend yield of DVY sits at 3.6%, which sits only marginally higher than the peer ETFs I just mentioned. I will circle back to discuss the performance and differences between DVY and some alternatives later on. The fund has a very reasonable expense ratio of 0.38% and DVY has been around for over two decades, with an inception date of 2003. Let's first start by taking a look into DVVY's holdings and what the diversity looks like. Holdings & Vulnerability DVY is diverse and gives exposure to many different industries with the leading exposure being within the utilities sector, accounting for 28.3% of the fund. This is closely followed by a 26% weighting to financial stocks. This level of diversity is nice because it mitigates any sort of concentration risk. However, I am unhappy with the low level of technology exposure. 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Additionally, peer ETFs outpace the dividend growth.The top holdings lean towards a higher dividend yield but lack price growth. The portfolio construction is a bit flawed and underperformance is likely to continue.DVY leans towards the utilities sector, increasing the vulnerability to interest rate changes.   Daniel Grizelj Overview ETFs are such a great tool to utilize because they grant you instant diversity and exposure to some of the best companies in the world. However, not all ETFs are constructed the same and this selection process used may leave the fund with a lot of sub par holdings that do not deliver a sufficient level of total return. When it comes to dividend ETFs, the goal is to typically obtain a higher level of dividend income while still maintaining a total return that's similar to the S&P500 (SPY). Based on past performance, we can see that iShares Select Dividend ETF (NASDAQ:DVY) is one of these lackluster dividend funds because it underperforms the greater index by wide margin. Data by YCharts I've included a quick comparison of total return against similar dividend ETFs such as Schwab's US Dividend ETF (SCHD) as well as the Fidelity High Dividend ETF (FDVV). We can see that both of these dividend ETF alternatives outperform DVY by a wide margin of performance over the last 5 year period. While the ETF's stated objective is to track the investment results of the dividend stock paying index, I don't think this is a fair justification of the underperformance. Perhaps you are already thinking: \"well, I am okay with underperformance if it means a higher level of income\"! Unfortunately, DVY doesn't quite offer the highest of dividend yields as well. The current dividend yield of DVY sits at 3.6%, which sits only marginally higher than the peer ETFs I just mentioned. I will circle back to discuss the performance and differences between DVY and some alternatives later on. The fund has a very reasonable expense ratio of 0.38% and DVY has been around for over two decades, with an inception date of 2003. Let's first start by taking a look into DVVY's holdings and what the diversity looks like. Holdings & Vulnerability DVY is diverse and gives exposure to many different industries with the leading exposure being within the utilities sector, accounting for 28.3% of the fund. This is closely followed by a 26% weighting to financial stocks. This level of diversity is nice because it mitigates any sort of concentration risk. However, I am unhappy with the low level of technology exposure. Information technology only accounts for 3% of the fund's weight and I believe this is a large reason why the price growth has been lacking when compared to alternatives. iShares The lack of tech exposure means that there are a lot stocks within this ETF that see larger levels of growth. This means that companies such as Meta Platforms (META), Alphabet (GOOG), and Nvidia (NVDA) are not contributing to any price growth even though these tech companies all now pay a dividend. Additionally, the focus on utilities means that this ETF is more vulnerable to interest rate changes. It's no coincidence that the price performance has been lacking ever since the interest rates started rising. The utilities sector as a whole remains vulnerable to interest rate increases because these companies typically rely on affordable debt to fund operational growth and capital expenditures. As interest rates sit at decade highs, this means that debt acquired has a higher cost to maintain and may affect profit margins. As a result, there are less growth initiatives and expansion happening right now, contributing to the lack luster returns. We can see that the utilities sector (XLU) has struggled to gain any upside momentum in comparison to the tech sector. Data by YCharts As we currently sit in a 'higher for longer' interest rate environment, I believe that DVY will continue to underperform. While DVY gets the job done, it fails to thrive because of this interest rate vulnerability. Due to the ongoing high inflation levels and the strong labor market, I believe that rates will remain unchanged for the summer. Maybe there's a chance that interest rates will get cut by the end of the year, but even if they do, I believe that they will be light cuts given the upcoming elections and ongoing global conflicts.   DVY Fact Sheet However, DVY does give us exposure to different kinds of dividend stocks. What I mean by this is that we have a mix of high yielders with limited growth, exposure to low starting yields that have high growth rates, and middle of the road companies that a balance of both an average yield and a decent growth rate. No individual position accounts for more than 3% of the net assets. Altria Group (MO) is the largest individual position, closely followed by Verizon (VZ) and AT&T (T). These holdings are likely a large contributor to the fact that DVY's price has underperformed. The prices of the three top holdings are down big time over the last five year period. Data by YCharts Dividend & Valuation As of the latest declared quarterly dividend of $0.9975 per share, the current dividend yield is 3.6%. Since DVY focuses on companies with strong cash flows that have at least 5 years of established dividend history, the dividend has naturally increased over the years. For instance, the dividend has increased at a CAGR (compound annual growth rate) of 7.2% over the last ten year period. Even if we look at the growth over a smaller time horizon of five years, we can see that the dividend has increased at a CAGR of 6.3%. Lastly, DVY has increased the dividend at a CAGR of 8.1% over the last three year period. The growth of the dividend is an attractive component for investors looking to build up a stream of passive dividend income. However, the growth of the dividend here pales in comparison to the previously mentioned peers. Therefore, if you are looking for the absolute highest level of dividend growth, these alternatives may be better suited for your goals. For reference, here are the dividend increase rates for SCHD and FDVV.  SCHD: Dividend has increased at a CAGR of 10.8% over the last decade. FDVV: Has not been around for 10 years but has a strong dividend CAGR of 13.8% over the last three years.  Despite the lower level of increases for DVY, the dividend growth has still been impactful when dividends are reinvested and additional capital was invested at regular intervals, such as a dollar cost average strategy. To visualize this, I created a comparison through Portfolio Visualizer. This calculation assumes an initial investment of $10,000, with $250 invested on a monthly basis. This also assumes that dividends were reinvested throughout the entire holding period. DVY is represented by portfolio 1, the blue line. Portfolio 2 represents SCHD and portfolio 3 represents FDVV. Portfolio Visualizer Since FDVV is a newer fund, the history here only goes back to 2017. In 2017, the dividends received from DVY would have totaled $392. In comparison, the dividend income from SCHD would have been $362 and FDVV would have totaled $471. Fast forwarding to 2023, we can see that FDVV has outpaced DVY and SCHD in terms of dividend amount received. The totals for 2023 would have closed at:  DVY:$1,701 in dividends received SCHD: $1,851 in dividends received FDVV: $1,969 in dividends received  In terms of valuation, the price growth of DVY has been underwhelming when compared against other dividend focused ETFs. We can see that over a two year time span, DVY's price has barely moved. However, DVY currently trades at a price to book ratio of 1.69x, which dramatically undercuts the price to book ratio for the SPY. For reference, the SPY's price to book ratio sits at 3.22x Data by YCharts While it can be difficult to come up with a valuation on an ETF I do see limited upside as the top holdings are known for their ability to distribute large amounts of their earnings towards dividends. This translates to less capital than can be allocated towards growth initiatives and reinvested back into the business. For example, Altria's dividend is 8.6% and it has a payout ratio of nearly 80%. Similarly, Verizon has a dividend yield of 6.7% with a payout ratio of 60%. Downsides Besides the lackluster performance, an additional downside is that the dividend yield of DVY is not large enough to provide a large enough income stream for a retired investor. The 3.6% dividend yield would mean that you are required to invest over $1M to generate anything close to a livable income that's required for most places within the US. For reference, the median individual income for the US sits at about $40,000 as of 2022. To produce an income to that aligns with this median personal income, you would need over $1.1M invested within DVY. Therefore, if you are looking for a high current income as quickly as possible, a mix of business development companies, REITs, or even closed end funds may be more up your alley. For example, here are the amounts that would be needed to generate the same $40,000 dividend income when including different asset classes.  VanEck BDC Income ETF (BIZD): $383,141 Cohen & Steers REIT & Preferred Income Fund (RNP): $487,804 Janus Henderson AAA CLO ETF (JAAA): $630,914  Fred Economic Data While you can argue that less capital would be required if you were to hold for a longer period of time and let compound interest do its thing alongside the fund's future dividend growth, I still think the mentioned peer dividend ETFs would be a better fit. SCHD and FDVV has both provided better levels of dividend growth and would eliminate the amount of time you would need to stay invested to eventually produce a large enough income stream. Takeaway  While DVY gets the job done by providing diversified exposure to many dividend paying companies, there are much better alternatives out there that have similar expense ratios while delivering superior price growth through a better set of holdings. I believe that the lack of tech exposure will ultimately continue to be a large contributing factor on why the price fails to capture upside movement that is on par with the peer ETFs. Additionally, the large weighting towards the utilities sector means that DVY is a bit more vulnerable to fluctuations in interest rates. Therefore, I am rating DVY as a Hold as the fund doesn't excel in anything particular besides having a higher starting yield.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2439693117"}