Dividend ETFs are a popular source of income for investors looking for a steady flow of cash. It is common for dividend ETFs to have a lower beta because a dividend usually shows that a company is in fairly good financial health, so the investment is considered less risky by market participants. Investors also appreciate that dividend ETFs offer more control over their money and view them as a way to weather the effects of inflation because payouts are made regularly. However, in some unfortunate situations, the company can turn out to be a dividend trap that attracts investors by offering them a high return. Another disadvantage of dividend investing is the price performance of dividend-paying stocks over long periods of time. As they tend to reward shareholders through dividends, these companies typically invest less in future growth opportunities and therefore struggle to outperform the market. In this article, I will review the Global X SuperDividend US ETF (NYSEARCA:DIV), which provides exposure to a basket of high yielding US stocks.
The Global X SuperDividend US ETF tracks the performance of the Indxx SuperDividend US Low Volatility Index. This index invests in 50 of the highest paying equity securities in the United States. This strategy aims to provide monthly dividend distributions. DIV has made monthly distributions for 8 consecutive years. Finally, DIV selects stocks that have exhibited low betas against the S&P 500 with the aim of producing low volatility returns.
If you want to know more about the strategy, please Click here.
Composition of the portfolio
From the sector allocation table below, we can see that the index places a high weighting on consumer staples (representing around 24% of the index), followed by utilities (representing 15.40 % of the index) and industries (representing about 12.% of the index). the bottom). The three main sectors have a combined allocation of approximately 51.80%. Overall, I like that DIV is quite well diversified across sectors. In terms of geographic allocation, DIV only invests in US equities.
DIV invests more than 40% of the funds in small capitalization value issuers, characterized as small companies where value characteristics predominate. Small cap issuers are generally defined as companies with a market capitalization of less than $2 billion. The second largest allocation is to large cap value stocks. Interestingly, DIV allocates around 82% to value stocks which typically generate excess cash and are therefore able to return capital to shareholders. I like the fact that more than 50% of the portfolio is invested in small caps, which generally tend to outperform large caps over the long term.
The fund is currently invested in 50 different stocks. DIV is very well diversified among issuers. The top ten holdings represent 25.90% of the portfolio, with no stock weighing more than 3%.
Since these are stocks, an important characteristic is the valuation of the portfolio. According to Global X ETFs, the fund is currently trading at an average price-to-book ratio of 2.14 and an average price-to-earnings ratio of 13.41. In addition, the portfolio has a return on equity of 16.40%. I like the fact that DIV offers exposure to a basket of cheap stocks that have a good return on equity on average. However, valuation is not the only driver of future returns. I believe that the quality of issuers is an equally important factor in determining future returns.
Is this ETF right for me?
DIV has a payout ratio of 5.8%. Given the relatively high dividend yield compared to a plain vanilla S&P 500 ETF, this ETF is suitable for the dividend investor looking for a source of monthly income. That said, you should keep an eye on the dividend growth history, which clearly shows a negative trend since 2016. As a dividend investor, the last thing you want is your monthly dividend payout. begins to decrease.
Below I compared the price performance of DIV to the price performance of the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) and the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) over 5 years to determine which was better. investment. During this period, DIV underperformed both strategies. DIV underperformed SPY by a margin of 75 percentage points, meaning you would have been better off buying the S&P 500 index even if it was underperforming. To put DIV’s performance into perspective, a $100 investment in DIV five years ago would now be worth $80.56, excluding dividends. This represents a compound annual growth rate of -4.23%, which is an awful performance in one of the biggest bull markets in US history.
If we step back and look at the performance of the strategy from a 9-point perspective, the results don’t change much. In the chart below, we can see that the S&P 500 has clearly outperformed DIV. I am personally concerned about DIV’s lack of capital appreciation over such a long period of time. Even if you end up having a positive return after 9 years if you factor in dividends, price performance is clearly a drag on total return. The same cannot be said for VYM, which shows that you can both have a decent dividend yield and generate capital gains.
Key points to remember
In summary, DIV provides exposure to a basket of high yielding stocks in the United States. This ETF is very well diversified, both across sectors and issuers, and can be used to generate a steady stream of income. Personally, I would keep an eye on dividend growth going forward to ensure the strategy maintains a stable dividend amount. I am also concerned about the negative price performance over the years which has led to lackluster returns and I see no catalyst that could change this trend. Despite DIV’s cheap valuation, I think there are better opportunities in the market right now.