RDIV: 4.31% Expected Dividend Yielding ETF With Questionable Quality Features

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Andrii Yalanskyi/iStock via Getty Images Investment Thesis I last reviewed the Invesco S&P Ultra Dividend Revenue ETF (NYSEARCA:RDIV) on December 8, 2022, concluding that apart from delivering a high ...

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Since that article was published, RDIV has gained 8.99%, a solid result compared to high-yield funds like the SPDR S&P 500 High Dividend ETF (SPYD) and the Schwab U.S. Dividend Equity ETF (SCHD) but lagging behind those in the 3% dividend yield range like the Fidelity High Dividend ETF (FDVV) and the Vanguard High Dividend Yield ETF (VYM). Seeking Alpha RDIV is a challenging ETF to keep tabs on, logging a 127% portfolio turnover rate for its most recent fiscal year. Furthermore, its frequent reconstitution leads to significant risk, growth, and value changes. Still, the one consistent factor is RDIV's relatively poor quality, which is why I don't recommend it to readers. This article highlights these and other features of RDIV compared to the four peers listed above and reiterates my previous conclusion that while income investors might like RDIV, it's not appropriate from a total returns perspective. I hope you enjoy the read. RDIV Overview Strategy Discussion RDIV tracks the S&P 900 Dividend Revenue-Weighted Index, selecting the top 60 dividend-yielding stocks in the large-cap S&P 500 and mid-cap S&P 400 Index. The Index reconstitutes each January, April, July, and October, and since selections are yield-driven, investors can expect a portfolio with relatively strong valuation features compared to its broad-market benchmark. In turn, price momentum is typically weak, and depending on the market conditions at each reconstitution, you might get a portfolio of stocks that have weak growth features and are generally disliked by Wall Street analysts. The Index takes some steps to avoid dividend yield and safety traps. For example, the Index excludes stocks in the top 5th percentile by dividend yield (45 stocks) and those with a dividend payout ratio in the top 5% of their respective sector. In addition, selections are revenue-weighted, not yield-weighted, so even if an outlier does make its way into the Index, it won't have much influence without strong sales numbers. Understanding The Index Universe To understand RDIV's selections, we must first analyze its starting universe, the S&P 900 Index. Let's work through the screening process below. 1. The Index starts by eliminating non-dividend-payers. This group includes 239/900 stocks, so the eligible universe is now at 661. 2. The dividend yield trap screen described earlier removes the top 45 stocks (5%) by dividend yield, narrowing the eligible universe down to 616. 3. The dividend payout screen also removes 45 stocks from eligibility, though 12 were included in the prior step. If the Index reconstituted today, the eligible universe would consist of 583 stocks, 317 less than the starting 900. Roughly half of the 317 stocks removed (151) have Seeking Alpha Profitability Grades of \"A-\" or better, so it's a big blow to quality. Furthermore, the remaining stocks with this minimum Profitability Grade have only a 1.83% average dividend yield, so most won't be selected. Therefore, while RDIV is almost certain to offer a high dividend yield, it's just as sure to be below-average quality. RDIV Profile and Peer Group The following table is a profile and dividends summary provided by Seeking Alpha. Here, we see that RDIV's 4.06% trailing dividend yield is the second-highest behind SPYD, but it also has the highest expense ratio at 0.39%. All five pay quarterly dividends, but SCHD and VYM have the best dividend growth track records by far, currently on 12- and 13-year streaks, respectively. Seeking Alpha RDIV's three- and five-year dividend growth rates are less consistent, at -1.41% and 6.50%, reflecting how dividend growth isn't its primary objective. Most of the dividend growth you'll get from RDIV is \"synthetic\", meaning it results from the Index rotating quarterly into the highest-yielding stocks each quarter rather than its selections actually increasing their payments. The latter \"organic\" dividend growth might reflect strong financial health, but as discussed earlier, that's likely not the case here. RDIV Performance Since October 2013, RDIV has gained 180.28% on total returns, compared to 225.41% and 192.16% for SCHD and VYM. It was also more volatile (standard deviation), and its 40.38% drawdown in Q1 2020 contributed to its poor downside risk-adjusted returns (Sortino Ratio). That's the risk you take when you don't screen for quality. Portfolio Visualizer Of course, the benefit is higher portfolio income. As shown below, RDIV generated far more than SCHD and VYM initially. Still, SCHD's yield on cost ten years later in 2023 surpassed RDIV's, assuming you decided to reinvest dividends. Therefore, it's worth thinking about your time horizon before picking a fund. If it's long, and you don't need the income right away, a dividend growth approach is preferable. Portfolio Visualizer SPYD and FDVV launched after RDIV, but the performance summary below tells a similar story. Like RDIV, SPYD also does not have any quality screens beyond those required for initial entry into the S&P 500 Index. The result was a 36.55% drawdown in Q1 2020 and poor risk-adjusted returns. In addition, it took about seven years for FDVV's yield on cost to surpass RDIV's. Portfolio Visualizer RDIV Analysis The following table highlights selected fundamental metrics for RDIV's top 25 holdings, totaling 84.01% of the portfolio. I've also included summary metrics for SPYD, SCHD, FDVV, and VYM at the bottom. The Sunday Investor 1. RDIV holds many stocks in the Financials sector, such as PNC Financial Services (PNC) and Fifth Third Bancorp (FITB). In total, Financials comprise 27% of the fund, far more than its peers. This improves the portfolio's dividend yield and valuation characteristics, but it comes at the expense of risk (beta) and quality. The Sunday Investor 2. RDIV features a 4.70% Index yield, which, after deducting the fund's 0.39% expense ratio, shareholders should receive 4.31% at current prices. It's an improvement over the fund's 4.06% trailing dividend yield but still below what SPYD offers (4.64% Index yield, 4.57% net yield). Meanwhile, SCHD should pay close to 4%, while FDVV and VYM are under 3%. 3. RDIV trades at 13.43x forward earnings using the simple weighted average method and 12.02x using the harmonic weighted average method used on sites like Morningstar. RDIV's value score is 6.56/10 on a sector-adjusted basis, which ranks #15/182 among all the value ETFs I track. Therefore, while RDIV only indirectly selects value stocks through its dividend yield screens, it is one of the best value ETFs available and should benefit from a strong rotation out of growth. We saw that potential in 2022 when RDIV gained 7.14% compared to an 18.17% decline by the SPDR S&P 500 ETF (SPY). Unfortunately, it gave back that outperformance the following year and has continued to lag in 2024. 4. RDIV features virtually no growth, which isn't unusual for value ETFs today, but is different than those in prior years. For example, when I recommended investors take profits on RDIV in April 2022, its one-year estimated sales and earnings per share growth rates were 7-8% compared to 0-1% today. SPYD and SCHD are also flat, and I suspect each of these ETFs has crossed a \"minimum growth threshold\" that leads investors to overlook their robust value features. Nobody wants to buy companies that aren't growing, so until this improves, I prefer to hedge my bets with more balanced funds like FDVV. It's more expensive at 22.97x forward earnings but offers 6.40% estimated earnings growth. 5. Lastly, I want to circle back by highlighting RDIV's quality, measured by its 8.16/10 profit score. It's not too bad, but this score ranks only #104/182 among all value ETFs, so it's slightly below average. Its 11.83% weighted average net margin figure ranks #144/182, while FDVV is #3/182, so the difference is quite stark and supports my view that FDVV is the superior choice. Even SCHD, which has flat growth rates, holds far more profitable stocks that should outperform over the long run. Investment Recommendation  RDIV has a 4.31% expected dividend yield and is an attractive option for income investors. It's also an excellent value play, and in a rotation to value, it could substantially outperform the market. RDIV's weaknesses include poor diversification, low growth rates (sales, earnings, dividends), and below-average quality, indicating it's likely to underperform under normal and bullish market conditions. As a total returns investor, it's not for me. However, I acknowledge its fundamentals look better than I expected, so I have assigned RDIV a neutral \"hold\" rating, with plans to re-evaluate at the subsequent quarterly reconstitution. 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/2450800395"}