DIVZ: 2.87% Yield And Improved Fundamentals For This Actively Managed Dividend ETF

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Dilok Klaisataporn Investment Thesis I last reviewed the Opal Dividend Income ETF (NYSEARCA:DIVZ) on May 5, 2023, describing how its high-conviction approach to dividend investing might appeal to the ...

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In my initial reviews, I questioned its managers' dedication to Energy stocks even as inflation peaked, but I noticed its exposure to the sector is down to a more reasonable 17%, and there have been several other exciting substitutions over the last year. Given these changes, it is appropriate to re-evaluate. In this article, I will reassess DIVZ's performance and fundamentals against four similar-yielding large-cap value funds. While I still have concerns about DIVZ's quality, I believe DIVZ's portfolio has significantly improved, so I have assigned the ETF a solid \"hold.\" I hope you enjoy the review. DIVZ Overview Strategy Discussion According to the fund website, DIVZ \"is designed for investors seeking lower volatility with higher dividend yield than the overall market while still having access to capital appreciation opportunities.\" Since its January 27, 2021 inception date, Austin Graff, the portfolio manager, has followed a disciplined strategy to select 25-35 companies across most sectors, currently only excluding Real Estate. These companies tend to have high cash conversion rates, low valuations, and reasonable growth expectations, albeit growth is not the primary objective. Instead, DIVZ has a dividend focus and recently accelerated its distribution schedule from quarterly to monthly, allowing more compounding opportunities for those opting to reinvest. Still, DIVZ's 0.65% expense ratio acts against the interests of income investors, since fees directly impact shareholder distributions. It's not a good feature, and unless this is addressed, DIVZ's AUM growth is limited. Granted, DIVZ had about a $40 million increase over just a couple of weeks in May and June, bringing its total to $107 million, but otherwise, there has been little added interest in the fund since my last review. Performance Analysis Between February 2021 and June 2024, DIVZ gained 37.71%, a decent result that ranks #54/75 in the large-cap value category. It slightly lagged the Schwab U.S. Dividend Equity ETF (SCHD), whose growth potential has disappeared over the last few years. However, it outperformed the Franklin U.S. Low Volatility High Dividend Index ETF (LVHD) and the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD) by 14% and 4%, respectively. Portfolio Visualizer DIVZ did exceptionally well in 2022 as its high allocation to Energy stocks proved a winning strategy. However, the sector fell out of favor and DIVZ declined by 0.52% the following year. SCHD also has its fair share of growth-related problems, and LVHD and SPHD have always struggled with quality. Still, as an actively managed fund, I hoped DIVZ's manager would trade more frequently as market conditions changed. Please see the table below for a more comprehensive overview of the total returns for high-dividend ETFs for this period. The Sunday Investor There are a few exceptions, but most of the top performers have lower trailing dividend yields. Generally, growth rates and yields are negatively correlated, and since growth rates have declined substantially for value stocks over the last two years, many ETFs are incredibly unbalanced. Put differently, they were operating in a growth-favored market while featuring low-single-digit or negative earnings growth rates, which is a recipe for disaster. That's why SCHD has performed poorly recently, and others like the Fidelity High Dividend ETF (FDVV) have stood out. I made the call in December 2021 in this review of FDVV, and based on the number of articles published recently, most analysts have come to appreciate its balanced mix of growth, value, and dividends. I've covered most of these ETFs before, but I chose SCHD, SPHD, and LVHD as comparators because they consistently emphasize less-volatile high dividend stocks. I will also include the Federated Hermes U.S. Strategic Dividend ETF (FDV), another actively managed fund with a similar strategy. DIVZ Analysis Composition Analysis DIVZ is an ETF for stock pickers, as it includes only 31 holdings. I've listed them all along with their cash-adjusted weights and their allocations in FDV, SCHD, LVHD, and SPHD. The Sunday Investor As shown, DIVZ has a substantially different composition than these peers. FDV is the most similar, with 26.54% allocated to these holdings, so at a minimum, it's different than what you might already own. NextEra Energy (NEE) and American Electric Power (AEP) are the top two Utilities stocks, which give it a nice defensive feel. At the same time, there are some higher-risk stocks in the Technology and Financials stocks like Broadcom (AVGO) and Citigroup (C), each with five-year betas of 1.19 and 1.45, respectively. Based on this composition and my prior research of the fund, DIVZ's manager is a student of Modern Portfolio Theory, supporting the concept that the sum of a portfolio's parts is greater than the whole. He's selected stocks that he believes work well together and can maximize risk-adjusted returns. To illustrate, here is a three-year backtest of the current holdings and weights, set to rebalance quarterly. To get that history, I removed DIVZ's smallest holding, Kenvue (KVUE), as it only began trading after it separated from Johnson & Johnson (JNJ) on August 23, 2023. Portfolio Visualizer The current portfolio gained 40.61% between July 2023 and June 2024 compared to 32.92% for the SPDR S&P 500 ETF (SPY). In addition, its risk-adjusted returns (Sharpe Ratio) were far superior, so I'm confident DIVZ's manager at least considers these types of simulations. From a sector allocation perspective, DIVZ is reasonably well-diversified, with no sector accounting for more than 20% of the portfolio and allocations to 24 unique sub-industries. That's good for a 31-stock fund, but diversification will always be a potential weakness with these types of funds. The Sunday Investor DIVZ Dividend Analysis DIVZ has an \"A\" Dividend Grade from Seeking Alpha. However, the change to monthly distributions made some calculations that drove this grade inaccurate. For example, the total distributions over the last year four quarters (three quarterly payments, three monthly payments) were $0.9172 per share, and based on the current $30.37 share price, the trailing dividend yield is 3.02%. The 3.70% listed below incorrectly includes the extra June 2023 payment of $0.2070 per share. Seeking Alpha As a result, the dividend growth rates listed are also not accurate. The prior year's dividend per share totaled $0.9319, so the one-year dividend growth rate is -1.58%, not 20.77%. Finally, the three-year dividend growth rate can't be calculated since DIVZ has yet to have the required four years of history. Therefore, it's safe to assume DIVZ will not earn an \"A\" Dividend Grade once these differences are corrected. DIVZ Fundamental Analysis The following table highlights selected fundamental metrics for DIVZ's top 25 holdings, totaling 89.59% of the portfolio. I've also included summary metrics for FDV, LVHD, SPHD, and SCHD at the bottom. The Sunday Investor Here are four observations to consider: 1. DIVZ's weighted average dividend yield is 3.52%, but after deducting its 0.65% expense ratio, shareholders can only expect 2.87%. It's certainly disappointing for income investors, but from a total returns perspective, it's not a negative. One of DIVZ's most significant changes over the last year is an increase in semiconductor exposure from 2.97% to 10.87%. DIVZ now holds Broadcom (AVGO), QUALCOMM (QCOM), and Taiwan Semiconductor (TSM) and removed Analog Devices (ADI), which substantially improved the portfolio's momentum characteristics. Seeking Alpha 2. DIVZ has a 0.91 five-year beta, much higher than the 0.73 figure from May 2023. Again, this might be a positive, as it reduces the chances that DIVZ will underperform if the bull market continues. Looking at the individual stock betas, DIVZ takes more of a barbell approach to risk management compared to other ETFs, which is made possible through its active strategy. Despite having the same 0.91 beta, DIVZ has 26% allocated to stocks with betas above 1.25 compared to 21% for SCHD. It's a nice feature that helps improve the portfolio's efficiency. 3. The change in semiconductor and energy stocks has helped DIVZ maintain a respectable 3.89% and 3.18% estimated one-year sales and earnings per share growth rate, setting it apart from SCHD's 0.65% and -1.00% figures. Importantly, DIVZ has improved its forward P/E discount over SCHD from 1.05 points to 1.43 points (16.08x vs. 17.51x), so I think it offers a nice mix of growth and value. As discussed earlier, maintaining that balance is crucial to avoid substantial underperformance in case certain factors fall out of favor (i.e., low volatility, value). As an actively managed fund, DIVZ can do that easier than most, and I hope it keeps up. 4. DIVZ's main weakness is its quality, evidenced by an 8.21/10 Profit Score I derived using individual Seeking Alpha Factor Grades. Among large-cap value ETFs, that score ranks #97/108, and the main reason is \"F\" grades for Citigroup (C), Morgan Stanley (MS), and Goldman Sachs (GS). For Financial sector stocks, it's common to use ROA as the primary measure of quality, and among its sector peers with market caps above $100 billion, they do, in fact, rank at the bottom. JPMorgan Chase (JPM) and Charles Schwab (SCHW) are possible alternatives, as their ROAs are at least above 1%, but I assume they were excluded due to their low dividend yields. Investment Recommendation  I prefer buying high-quality stocks, so DIVZ's weakness in that factor disappoints me, and I'm hesitant to issue a \"buy\" rating. In addition, its 0.65% expense ratio works against the interests of income investors, leading to a somewhat low 2.87% expected dividend yield that I doubt will attract many new investors. Still, the portfolio is much more balanced than before, especially given its added exposure to higher-growth Technology stocks and lower exposure to less predictable Energy stocks. DIVZ also trades at an attractive 16.08x forward earnings (13.76x harmonic weighted average), and its 0.91 five-year beta indicates it can still offer some decent downside protection should markets fall. Therefore, I rate DIVZ a solid \"hold\", and I think it's back to being one of the more exciting active funds investors should keep their eye on moving forward. Thank you for reading, and I look forward to your comments below.","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/2449777168"}